EUR/USD Price Forecast: Recovery is expected to be temporary

• EUR/USD added to Monday’s advance past the 1.0400 hurdle.
• The US Dollar gave away initial gains as tariff threats dissipated. 
• Market attention should remain on Trump’s announcements this week.

The Euro (EUR) found some extra footing against the US Dollar (USD) on turnaround Tuesday, once again pushing above the 1.0400 yardstick as the Greenback lost upside traction in the latter part of the session. Indeed, the US Dollar Index (DXY) eventually settled around 107.60 after fading an earlier move to as high as the 108.50 zone.

In the meantime, the Dollar’s price action continued to look almost exclusively to Trump-related headlines, particularly those regarding the likelihood of trade tariffs.

A glimpse at the past week notes that the resurgence of weakness around the US Dollar was also amplified by disappointing economic data on the US calendar and dovish comments from FOMC Governor Christopher Waller, as he hinted last week that more rate cuts could be on the table if economic conditions warrant them. This uncertainty over the Fed’s next moves has left investors reassessing the central bank’s stance ahead of its January 28-29 meeting.

Central banks driving the narrative

Monetary policy remains a key focus for markets. December’s robust U.S. jobs report (+256K Nonfarm Payrolls) initially fuelled hopes for a steadier Fed, with most traders now expecting either a slight 25-basis-point rate cut or no change at all at the upcoming meeting.

The Fed cut rates by 25 basis points in December, bringing them to a range of 4.25%–4.50%, and signalled a more cautious path ahead for 2025. Fed Chair Jerome Powell reaffirmed the central bank's commitment to its 2% inflation target, noting that 2024 inflation came in higher than expected. Powell emphasised the need for balance, particularly as the labour market shows signs of gradual cooling.

On the other side of the Atlantic, the European Central Bank (ECB) is likely to continue its own rate-cutting efforts to support growth in the eurozone, especially in Germany. Inflation in the region ticked higher in December, but ECB Vice President Luis de Guindos stressed that further rate decisions will depend on how inflation evolves. He also highlighted the risks posed by global trade tensions, fiscal shifts, and geopolitical uncertainties.

Trade policy adds to market jitters

Uncertainty surrounding President Trump’s proposed trade tariffs is adding another layer of complexity. If enacted, these tariffs could stoke U.S. inflation, potentially forcing the Fed to maintain a more hawkish monetary stance. This could bolster the USD, creating more challenges for EUR/USD.

Technical outlook: EUR/USD 

The EUR/USD pair faces key support at 1.0176, the year-to-date low set on January 13, and the psychologically important parity level of 1.0000. Resistance is seen at 1.0436 (2025 high from January 6), 1.0479 (55-day SMA), and 1.0629 (December peak). 

The broader bearish trend remains intact as long as the pair stays below the 200-day SMA at 1.0774. Short-term momentum appears mixed—while the RSI has rebounded to around 55, indicating slight improvement, the ADX has weakened below 30, signalling a loss of trend strength. 

EUR/USD daily chart

Challenges ahead for EUR/USD 

The Euro faces significant headwinds, including a strong Dollar, divergent monetary policies, and economic struggles within the eurozone. Growth concerns in Germany and ongoing political uncertainty in the bloc add further weight. While the Euro may stage a short-term recovery, sustained gains seem unlikely in the face of these persistent challenges.