EUR/USD Price Forecast: Further gains look likely above 1.0530

• EUR/USD traded with modest gains above the 1.0400 barrier.
• The US Dollar reversed recent gains on disappointing US data. 
• The ECB reduced its key interest by 25 bps, as broadly estimated.

The European currency managed to regain some balance vs. its US counterpart on Thursday, prompting EUR/USD to set aside three daily pullbacks in a row while sparking a corrective decline in the US Dollar Index (DXY), which saw part of its weekly gains trimmed.

Dollar lost some of its shine

The US Dollar Index (DXY) faced a mild selling pressure and maintained its business in the vicinity of the 108.00 zone, coming back from Wednesday’s fresh four-day highs in the wake of the hawkish hold by the Federal Reserve (Fed) at its meeting. Thursday’s small downtick comes along a lacklustre rebound in US yields across the curve, while investors are keeping a close eye on President Trump’s trade policies, which have kept markets jittery since his Inauguration Day on January 20. Although a delay in imposing tariffs on the eurozone is expected to provide temporary relief for the Euro, the uncertainty remains, casting a shadow over the currency’s future.

Central Banks in the Spotlight

The Federal Reserve decided to keep interest rates steady on Wednesday, offering little guidance on when they might lower borrowing costs. Despite strong economic growth, persistent inflation above the target and low unemployment rates leave the Fed hesitant to make changes. In a notable shift, the Fed replaced its previous statement that inflation "has made progress" with one stating that price pressures remain "elevated." This change signals a more cautious approach as they await further evidence of cooling inflation. The unanimous decision to maintain the federal funds rate at 4.25%–4.50% underscores the Fed’s wait-and-see strategy, especially as they consider the economic impacts of Trump’s trade and fiscal policies.

Meanwhile, the European Central Bank (ECB) met expectations by cutting interest rates by 25 basis points and hinted at more easing ahead. The ECB remains optimistic that inflation in the eurozone is gradually coming under control, despite ongoing global trade concerns. Although the eurozone economy is still sluggish, recent surveys show some signs of improvement, and inflation remains just above the ECB's 2% target, justifying the rate cut.

Later, at her press conference, President Christine Lagarde stated that the ECB is not planning to reduce interest rates below the neutral level to stimulate the economy. She emphasised that rate decisions are made based on current data without committing to a specific pace. When it came to tariffs, Lagarde highlighted the complexity of economic factors, including global interest rates, trade shifts, and potential retaliatory measures. She reassured that a significant 50 basis points rate cut was never considered, with unanimous support for a 25 basis points reduction instead. She also affirmed confidence that inflation in the bloc will reach the 2% target by 2025 but warned that economic growth risks remain, particularly due to increased global trade tensions, which could keep the eurozone economy weak in the near term.

Tariff tensions could worsen the situation

The looming threat of US trade tariffs continues to cast a long shadow over the Euro. Should these tariffs be implemented, they could drive US inflation higher, potentially prompting the Fed to adopt a more hawkish stance. This would strengthen the Dollar even further and put additional pressure on the Euro, possibly dragging EUR/USD back to the critical parity level of 1.0000.

Technical outlook: Uncertain waters

From a technical standpoint, EUR/USD is navigating through mixed signals:

- Support levels: The pair finds initial support at 1.0176, the lowest point this year. A break below could open the door to the psychological 1.0000 mark.

- Resistance levels: On the upside, resistance is seen at 1.0532 (the YTD peak from January 27), seconded by 1.0629 and the 100-day Simple Moving Average (SMA) at 1.0666.

- Momentum Indicators: The Relative Strength Index (RSI) has dipped below 52, indicating weakening bullish momentum, while the Average Directional Index (ADX) below 24 suggests the trend is losing steam.

EUR/USD daily chart

Looking Ahead: Challenges for the Euro

The Euro faces significant headwinds, including the Dollar’s resilience, differing policies between the ECB and the Fed, and structural issues within the eurozone, such as Germany’s economic slowdown. While short-term rallies are possible, sustained gains for the single currency seem unlikely in the current climate.