- Optimism over Ukraine peace talks is offsetting the impact of Trump’s tariff threats, keeping the euro’s downside limited for now.
- The 1.0400-1.0430 range is acting as support, while 1.0480-1.0500 remains a crucial resistance zone for a potential breakout.
- Friday’s Eurozone PMI data could provide the next directional push, with investors watching for signs of economic recovery.
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The EUR/USD fell on Wednesday morning to trade near the 1.04 handle, as it retreated further from the gains made last week.
There were no obvious catalysts behind the weakness, apart from President Donald Trump floating the prospect of tariffs of up to 25% on imports of automobiles, semiconductors, and pharmaceuticals. Along with the euro, European indices like the DAX retreated noticeably after rallying to a new record high, pulling S&P 500 Futures lower.
Right now, though, the EUR/USD isn’t selling off sharply because it is erasing the negative risk premium tied to the Ukraine war, with the peace negotiations appearing to offset the tariff threat in FX markets.
However, the latter is likely to have more tangible implications for the ECB, the economy, and, by extension, the euro, in the coming months. For now, though, markets are not focusing much on this, and the recent risk rally is helping to keep the euro’s downside limited.
Tariffs Threats Vs. Ukraine Peace Deal Optimism
Trump’s latest remarks only added to an already jittery market atmosphere this week, with tentative optimism over a possible resolution to the war in Ukraine dampened by the notable absence of Ukrainian and European officials from US-Russia discussions.
While it remains to be seen whether the trade tariffs will be implemented, the threat of it alone is holding back the EUR/USD and it may cause a more significant sell-off in the pair should Trump go ahead with his plans. But for now, those fears have been tampered with by the Ukraine peace negotiations, which is euro-positive.
The EUR/USD’s less-than-ideal performance this week follows a decent rally that was linked to optimism about the potential end of the Ukraine conflict. Though it hasn’t fallen off a cliff, the lack of any upside follow-through must be frustrating for the bulls, to say the least. In any case, the downside should be limited in the short-term outlook as negotiations continue over Ukraine.
Should Russia and Ukraine eventually strike a peace deal, the US Dollar may well face another correction. However, for now, markets are lacking any concrete bearish drivers for the greenback, which has allowed it to stage a bit of recovery along with bond yields.
Still, I think the risks are still skewed to the upside for the pair, which I think is still heading north of the 1.05 handle in the coming days.
German Investors Sentiment Improves
There isn’t much in the way of Eurozone data today, or tomorrow, with the PMIs on Friday likely to be the next big fundamental catalyst for this pair. Yesterday, the German ZEW Economic Sentiment came in stronger, climbing to 26.0, compared to 10.3 previously and 19.9 expected.
This is based on a survey of about 160 German institutional investors and analysts, rating the relative 6-month economic outlook for Germany. Therefore, it is a leading indicator of economic health, with the rationale being that investors and analysts are highly informed and changes in their sentiment can be an early signal of future economic activity.
The fact that this was the strongest increase in the ZEW indicator for Germany in the past two years is noteworthy.
It is likely that their optimism reflects the recent performance of the flying German DAX index and European markets in general, which in turn have been supported, in part, by the view that the Ukraine conflict may end soon and that the ECB is also going to cut rates.
US Dollar in Consolidation Mode Amid Lack of Data
The DXY is bouncing back slightly after a two-week drop and a flat performance in January, which ended a three-month winning run. It remains to be seen whether the recent retreat was just a correction for the dollar and whether that has now largely played out. But there’s still some scope for a risk-on, dollar-off, move should a Russia-Ukraine peace agreement materialise.
Last week’s hotter inflation data failed to lift the US dollar, which suggests the dollar may have already priced in upside risks to inflation, owing to Trump’s protectionist policies. There is no major US data this week, and it remains to be seen whether today’s release of the FOMC meeting minutes will be a market-moving event.
Later this week, the global PMIs are scheduled for Friday, which may impact the EUR/USD. The European PMIs are likely to show modest improvement, with the services Sector PMI seen printing 51.5 vs. 51.3 last and Manufacturing PMI expected to have improved to 48.5 from 48.3, remaining below the expansion threshold of 50.0.
The recent upsurge in major Eurozone indices such as the DAX suggests investors are expecting recovery to gather pace, but will this be evidenced in the latest PMI readings showing even better results than those expected by economists?
EUR/USD Technical Analysis and Trade Ideas
The EUR/USD remains stuck inside a range, but if last week’s price action is anything to go by, then one can expect to see some dip-buying now that it is testing support around the 1.0400-1.04300 range.
After establishing support last week, the pair has since been trying to break key resistance in the 1.0480–1.0500 zone, where it has encountered some pushback.
However, the recent higher lows indicate some buying interest, even if the broader technical outlook has not yet turned decisively bullish. I would be more confident in expecting higher levels on the back of some further bullish price action.
A decisive break above the 1.0480–1.0500 range could suggest a shift in sentiment. If that happens, we could see follow-up technical buying towards the next potential resistance levels of 1.0600 and possibly even 1.0700 thereafter.
All told, I am expecting to see a rally above the 1.05 handle, then, say, a breakdown below 1.02 support first.
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