Daily Price Outlook
During the European trading session, the EUR/USD currency pair prolonged its upward trend and remained well bid around the 1.0480 level. The reason for this bullish rally could be tied to increased demand for riskier assets and a weaker US dollar.
Investors are feeling more optimistic due to multiple positive developments, including the delay in Trump's proposed tariffs and hopes for peace between Russia and Ukraine. This has reduced the demand for the safe-haven US dollar, making the euro more attractive.
Euro Gains Support but Faces Pressure from ECB Rate Cut Expectations
On the EUR front, the shared currency has been supported by positive developments, including optimism over a potential Russia-Ukraine truce. If the conflict ends, it could significantly improve the Eurozone’s energy supply and ease supply chain disruptions.
However, the European Commission has strongly opposed Trump's proposed reciprocal tariffs, calling them a step "in the wrong direction" and warning of an immediate and firm response. While the delay in these tariffs has provided temporary relief, trade tensions remain a risk for the Euro.
At the same time, expectations of further rate cuts by the European Central Bank (ECB) could put pressure on the Euro against the US dollar. Several ECB officials, including Croatian central bank Governor Boris Vujčić, have signaled that three more rate cuts this year seem reasonable.
The ECB already lowered rates by 25 basis points to 2.75% last month, and if more cuts happen, the widening rate gap with the Federal Reserve could weaken the Euro.
Despite these concerns, the Eurozone economy showed slight growth in Q4 2024, with GDP rising by 0.1% compared to initial estimates of 0%. Employment also grew by 0.1% quarter-on-quarter and 0.6% year-on-year. While these figures indicate slow but steady progress, traders remain cautious about the Euro’s outlook against the US dollar.
US Dollar Weakens on Trade and Peace Hopes, but Fed’s Stance Limits Losses
On the US front, the broad-based US dollar edged lower as safe-haven demand faded due to a delay in Trump's reciprocal tariffs and growing hopes for peace between Russia and Ukraine.
This led to a fresh four-week low in the US Dollar Index (DXY), which tracks the Greenback’s performance against major currencies, slipping below 107.00. The reduced demand for the USD has given the Euro some support, helping EUR/USD stay strong.
However, the US dollar's outlook is not entirely bearish, as traders expect the Federal Reserve (Fed) to keep interest rates high for an extended period.
The Fed's current rate range of 4.25%-4.50% is expected to remain unchanged for at least the next three meetings, with a 50% chance of a rate cut in July. Fed Chair Jerome Powell recently stated that the central bank is ready to keep rates high if inflation remains above the 2% target and the economy stays strong.
Looking ahead, investors are closely watching US Retail Sales data for January, which is set to be released at 13:30 GMT. Economists expect a 0.1% decline in sales after a 0.4% rise in December. If the data is weaker than expected, it could put more pressure on the US dollar and further support EUR/USD.
EUR/USD – Technical Analysis
The EUR/USD pair is trading at 1.04560, down 0.01%, as the euro faces renewed pressure amid mixed macroeconomic signals. The pair continues to consolidate near its pivot point of 1.04369, suggesting a period of indecision for traders.
Technically, the pair remains above the 50-day EMA, currently at 1.03703, indicating underlying bullish potential. Immediate resistance is observed at 1.04927, with further targets at 1.05326 and 1.05696 if upward momentum strengthens.
A clear break above 1.04927 could attract fresh buying interest and shift the short-term outlook to bullish.
On the downside, immediate support lies at 1.03916, followed by 1.03452. A drop below these levels could expose the pair to further losses, with the next key support at 1.02963. The Relative Strength Index (RSI) remains neutral, hinting at possible volatility if the pair approaches the 1.04369 pivot.
Fundamentally, the euro remains vulnerable to external economic factors, including the Federal Reserve's cautious stance on rate adjustments and ongoing geopolitical uncertainties.
The latest PPI figures in the U.S. came in hotter than expected, reinforcing the Fed’s hawkish narrative and giving the dollar a slight edge. Meanwhile, investors are closely monitoring European inflation data due later this week, which could provide further direction.
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