EUR/USD Weekly Forecast: US Dollar returns to the spotlight
|- United States data painted the worst-case scenario for future Fed rate cuts.
- Mounting Middle East tensions exacerbate the market’s dismal mood.
- EUR/USD trades near a one-month low, with a stronger bearish tone.
The US Dollar (USD) stands victorious at the end of another week, with the EUR/USD pair trading near a four-week low of 1.1742, while the USD retains its strength despite some discouraging American data released at the end of the week. The pair edged higher on Friday, after the United States (US) Supreme Court ruled against President Donald Trump's tariffs, although the advance is not enough to change the latest USD flow.
Hawkish FOMC surprise
Most of USD's strength came from the Federal Open Market Committee (FOMC), following the release of the minutes of the January monetary policy meeting. Back then, officials decided to leave the benchmark interest rate unchanged, floating between 3.50% and 3.75%.
The document offered some hawkish surprises, as participants noted that “a two-way description of the path of policy could be supported,” which opened the door for potential rate hikes, albeit not something foreseeable in the near future. Officials also indicated that they are still data-dependent, something that upcoming Chairman Kevin Warsh would prefer to dismiss.
What was not a surprise was that the Committee remains divided: While several officials said additional cuts will “likely be appropriate” if inflation continues to decline, some favored keeping rates unchanged “for some time.”
Middle East tensions
The USD also benefited from mounting risk aversion. US and Iranian representatives met in Geneva for a second round of talks about Iran’s nuclear program. To sum up, Washington demands that Iran scale back its nuclear program, while Tehran refuses to do so. Negotiations are no new; they've been dragging on for years. Iran has become vulnerable after the US and Israel joint attack on military bases last year, but the theocratic country has the power to trigger a war in the Middle East. Recent talks and the obvious lack of progress spurred concerns among market participants, particularly after the US announced the deployment of military ships in the region on Thursday. The White House signaled it could be ready to strike Iran as soon as Saturday, while US President Donald Trump noted a deal must be achieved within a couple of weeks, subtly hinting at military action if it is not.
More US surprises
Macroeconomic figures coming from the Old Continent failed to impress. Germany confirmed the Harmonized Index of Consumer Prices (HICP) at 2.1% YoY in January, as expected. The country also published the ZEW survey on Economic Sentiment, which contracted against expectations of a better mood. The index printed at 58.3 in February, while the Eurozone sentiment came in at 39.4, both easing from the previous levels and missing expectations.
US data, on the other hand, introduced quite a bit of noise. The country published Initial Jobless Claims on Thursday, with unemployment claims up 206K in the week ended February 14, much better than the expected 225K. On the same day, the US reported that the Philadelphia Fed Manufacturing Survey improved to 16.3 in February, well above the 8.5 posted in the previous month, while the Goods and Services Trade Balance posted a deficit of $70.3 billion in December, worsening from the $53 billion deficit posted in November.
On Friday, the US reported that the Q4 Gross Domestic Product (GDP) expanded at an annual rate of 1.4%, missing the anticipated 3% advance, and easing sharply from the previous 4.4%. At the same time, December inflation was higher than anticipated, according to the Personal Expenditures (PCE) Price Index, the Fed’s favorite inflation gauge. Core annualized PCE rose 3% from 2.8% in November and is higher than the 2.9% anticipated.
Stable employment, yet higher inflation and tepid growth. The worst-case scenario for interest rate cuts. The Greenback initially fell with the latest news, but risk aversion helped it recover ground.
Finally, the Eurozone February Hamburg Commercial Bank (HCOB) preliminary Purchasing Managers’ Indexes (PMIs) resulted quite encouraging. The manufacturing index printed at 50.8, improving from 49.5. The Services PMI ticked modestly higher from the previous 51.6 to 51.8, with the Composite PMI resulting at 51.9.
Across the pond, the US S&P PMIs expanded at a softer pace in February, with the Composite PMI edging lower to 52.3 from the 53 posted in January. The Manufacturing PMI declined from 52.4 to 51.2, while services output eased to 52.3 from 52.7.
Data in the docket
The final week of February will be light in terms of first-tier data. The US will publish January Producer Price Index (PPI) figures, while Germany will unveil the flash estimates of the February Harmonized Index of Consumer Prices (HICP).
Nevertheless, geopolitical tensions and uncertainty surrounding the Fed’s future are likely to keep financial markets lively. Tensions between the US and Iran amid the latter's nuclear activity are on the brink of escalating, with the US building up military presence in the Middle East. Also, multiple Fed officials will be on the wires and may provide clear clues on the latest FOMC’s hawkish shift and their assessment of the potential impact of recent macroeconomic figures on future monetary policy decisions.
EUR/USD technical outlook
From a technical standpoint, the daily chart of the EUR/USD pair shows that the latest bounce was insufficient to sustain the bullish trend. The pair trades below a directionless 20-day Simple Moving Average (SMA), capping the upside at 1.1858. The longer moving averages remain below the current level, losing their bullish slopes. The 100-day SMA at 1.1689 and the 200-day SMA at 1.1652 provide relevant dynamic support. At the same time, the Momentum indicator turned higher yet stands around the neutral line. Finally, the Relative Strength Index (RSI) indicator ticks north at 48, not enough to confirm additional gains ahead. A daily close above the 20-day SMA could reopen the topside, while a break below the 100-day SMA at 1.1689 would expose the 200-day as the next support layer.
In the weekly chart, technical indicators gain downward strength but remain within positive territory, reflecting the recent USD strength without signaling a sustained EUR/USD decline. The pair remains above a flattening 20-week SMA at 1.1686, which is rising above the 100- and 200-week SMAs that trend higher, limiting the long-term bearish potential of the pair. Bulls could retake control if EUR/USD recovers beyond the 1.1860 price zone, quite an unlikely scenario if the Greenback continues to benefit from safe-haven demand.
(The technical analysis of this story was written with the help of an AI tool.)
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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