EUR/USD Price Forecast: Recovery needs to regain 1.0500 and beyond

In quite a sharp reversal from a dismal start to the new trading week, EUR/USD regained composure and advanced to the proximity of the 1.0400 region on Tuesday, up nearly 2 cents since Monday’s multi-week lows.

The pair’s strong rebound came on the back of further losses in the US Dollar (USD), which prompted the US Dollar Index (DXY) to break below the 108.00 support and hit two-day lows.

The renewed offered stance in the Greenback coincided with market participants assessing further President Donald Trump’s plans to delay the 25% tariff on Canadian and Mexican goods, while keeping in place a 10% charge on Chinese imports.

Despite the setback in the US Dollar, the tariffs narrative is expected to provide strong support for the currency and emerge as a significant catalyst for the anticipated bullish outlook for the currency in the coming year.

Central banks under the microscope: Fed holds steady while ECB eases rates

Central banks now face increased scrutiny. The Federal Reserve (Fed) chose to maintain interest rates unchanged last week, offering little indication of when a potential cut might occur. Despite robust economic growth, persistent inflation, and low unemployment, the bank remains cautious. Notably, it shifted its stance from stating that inflation had made progress to describing price pressures as “elevated,” signalling a more vigilant approach as it waits for clearer signs of cooling inflation. The decision to keep the federal funds rate at 4.25%-4.50% underscores a cautious wait-and-see strategy amid concerns about the potential impact of Trump’s trade and fiscal policies.

Across the Atlantic, the European Central Bank (ECB) met expectations by reducing interest rates by 25 basis points and hinted at potential further easing in the future. The ECB remains optimistic that eurozone inflation will gradually come under control, even as global trade concerns persist. While the eurozone economy continues to exhibit sluggish growth, recent surveys suggest some positive developments. Given that inflation has surpassed the ECB’s 2% target, the rate cut was viewed as justified.

In her press conference, President Christine Lagarde clarified that the central bank has no plans to lower interest rates below neutral levels to stimulate the economy. She emphasised that decisions are data-driven and that there’s no commitment to a rapid pace of easing. Lagarde made it clear that a drastic 50 basis point cut was never on the table—only a 25 basis point reduction has garnered unanimous support. She expressed confidence that the eurozone will achieve the 2% inflation target by 2025 but warned that rising global trade tensions could continue to slow economic growth in the near term.

Amidst the turmoil, who gains in a trade war?

Tariff tensions, particularly those driven by US policy, could further complicate the euro’s trajectory, as well as that of the broader risk complex, in the near-to-medium term. If tariffs persist, they might fuel US inflation and prompt the Fed to adopt an even more hawkish stance, thereby strengthening the dollar and potentially pressuring its rivals—which could pave the way for EUR/USD to return to the key parity level in a not-so-distant future.

Technical view

EUR/USD is navigating uncertain waters. The pair found initial support at the weekly low of 1.0209 (February 3), while a break of that regio could put a potential visit to the 2025 bottom of 1.0176 back on the radar. If cleared, spot could then signal a move toward the psychological parity level.

On the positive side, resistance is spotted at 1.0532 (the YTD peak from January 27), with further hurdles at the December peak of 1.0629 and the 100-day Simple Moving Average at 1.0645.

Momentum indicators also add to the caution: the Relative Strength Index (RSI) has rebounded to around 49, indicating strengthening momentum, while the Average Directional Index (ADX) near 21 suggests that the current trend is losing steam.

EUR/USD daily chart

Challenging road ahead for the euro

Looking ahead, the euro faces a challenging path. The US Dollar’s resilience, divergent central bank policies between the ECB and the Fed, and structural issues within the eurozone—such as Germany’s slowing economy—could all hinder sustained gains for the single currency. While short-term rallies may occur, the overall outlook for the euro remains uncertain.