Key Analysis Points:
- EUR/USD Performance Neutral Around Gains, Awaiting New Catalysts.
- US Inflation Most Closely Monitored This Week.
- Effectiveness of European Stimulus Impacts Euro Gains.
During last week's trading, the EUR/USD currency pair jumped from the support level of 1.0388, with gains extending to the resistance level of 1.0888, the pair's highest in four months. At the beginning of the US inflation week, the EUR/USD price remained within a narrow range between the support level of 1.0805 and the resistance level of 1.0875 before stabilizing around 1.0833 at the time of writing the analysis, awaiting further stimulus to move upward or face profit-taking selloffs amidst overbought signals from some technical indicators.
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The EUR/USD pair is neutral awaiting any new developments
According to Forex market trading, EUR/USD price recorded weekly gains of 4.4 percent, the largest weekly gain in 17 years. In general, dear reader, it is not surprising then that we enter the new week’s trading believing that some neutrality is appropriate for these quick gains in the short term.
EUR/USD Technical Analysis Today:
On the technical side, the Relative Strength Index (RSI) on the daily chart is at 72.29, with a reading above the 70-level indicating it is technically overbought and very likely to return to the average. The likelihood of the RSI returning below 70 is very high, so the EUR/USD exchange rate must consolidate or decline. Overall, this is the expected scenario for this week's trading. This leads us to expect a range between 1.0762 and 1.0930 (the highest level in November 2024) for this week's trading. The bigger picture, the recent advance saw the EUR/USD pair break above the 200-day exponential moving average at 1.0645, turning the market from a downtrend to an uptrend, according to this week's forecast model. Thus, while the near term is subject to neutrality, the broader setup has become constructive, and we look for steady progress higher to 1.1068 and then the 2024 highs at 1.12 resistance.
German stimulus supports EUR gains
According to licensed trading companies' platforms, the Euro's gains are due to a significant rise in German government bond yields – up about 40 basis points last week – after political leaders approved a €500 billion infrastructure spending plan and provided more funds for defense. The German spending decision affects the Euro through the European Central Bank's policy, as it is inflationary. Therefore, the market sees much less room for interest rate cuts by the ECB in the coming weeks and months.
Trading Tips:
The recent gains of the euro dollar need strength factors to continue and exceed the 1.10 peak to confirm the upward shift, otherwise it will be exposed to profit-taking sales.
US Tariffs on Europe Threaten the Euro
However, there is still reason to be cautious, as the US president is likely to soon clarify plans to impose tariffs on European imports. As for the euro’s outlook, once the US tariffs on the European Union are announced and implemented, we look forward to a decline to lower levels. However, most analysts see the decision by German politicians last week to break the country’s long-term debt rule as a potential watershed moment for the forex markets.
In general, most currency analysts were reluctant to change their forecasts radically. Moreover, they all agree that based on recent developments, the strength of the euro poses a significant risk to the current outlook. The German spending decision is inflationary, which means that the market sees much less scope for interest rate cuts by the European Central Bank, which supports bond yields and the euro.
Overall, the focus of the euro this week will be on Germany, where spending plans are expected to be passed. Over the weekend, the CDU/CSU, which won the recent elections, and the Social Democrats presented details of plans to boost growth. According to experts, if the expected reforms are implemented along with more public spending, they are likely to boost the German economy significantly.
Experts believe that the plans will boost German economic growth from 1.2% in 2026 and 1.0% in 2027 to 1.4% for both years. German inflation is expected to rise to 2.4% in 2026 and 2.5% in 2027 from 2.3% this year.
At the same time, the US dollar played an equally important role in the euro’s rise against the US dollar, with broad-based weakness accelerating following the US’s recent decision to pursue tariffs on Canada, Mexico and China. The tariffs themselves are clearly positive for the US dollar because they are inflationary, but financial markets are now more concerned that the tariffs, coupled with erratic policymaking, are likely to be a major headwind for US growth. Given this, the market has raised bets on the number of US interest rate cuts by the Fed in 2025 to three, compared to just one cut that was “priced in” in early February.
Cautious anticipation of US inflation numbers
This week, if the US inflation report comes in below expectations, these bets will rise further, weighing on the US dollar. Inflation figures will be needed to significantly undermine the US dollar. US headline inflation is expected to fall to 2.9% in February due to lower energy prices, partly offset by higher food prices. Also, core inflation is expected to fall to 3.2%.
However, the potential for upside surprises is high. In January, both headline and core inflation rose compared to December. While some of this rise can be attributed to seasonal adjustment issues, ongoing inflationary pressures have also played a role. Finally, tariff concerns and general political uncertainty surrounding Donald Trump also point to upside surprises for inflation figures.
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