The EUR/USD exchange rate has shown signs of volatility, pulling back from its year-to-date high of 1.1570 to hover around 1.1250 in the latest sessions. This movement reflects a confluence of fundamental pressures, notably from US macroeconomic data and European Central Bank (ECB) guidance, as well as technical factors that suggest a potential rebound from key support zones.
The article from Monovex provides a well-rounded assessment of this matter.
US Dollar Weakness and Market Sentiment
The US Dollar Index (DXY) softened this week as traders exercised caution ahead of key economic releases from the United States. Two events are of paramount interest: the upcoming Consumer Price Index (CPI) report and the retail sales data, both scheduled for midweek.
These figures are expected to provide clearer insights into the impact of tariffs on the US economy and consumer spending behavior. According to forecasts, headline CPI is projected to rise to 2.5%, slightly above March’s 2.4%.
While modest, this increase continues a pattern that analysts—including those at Goldman Sachs—believe will intensify, potentially reaching 4% by year-end. Sustained inflation would increase pressure on the Federal Reserve to tighten monetary policy, which could support the dollar in the medium term.
Retail sales data will also play a pivotal role. As consumer spending constitutes more than two-thirds of US GDP, any softening would be a warning sign that tariffs and inflationary pressures are beginning to weigh on the real economy.
Geopolitical Developments and Market Impact
The EUR/USD pair also responded to renewed optimism following the first round of US-China trade talks held in Switzerland. While largely symbolic, statements from the US President and the Treasury Secretary suggested meaningful progress. Bessent indicated that both sides had laid “significant groundwork” for continued negotiations.
Should a trade agreement be reached, it would likely reduce global business uncertainty and potentially benefit the euro, especially if risk-on sentiment returns to financial markets. Additionally, a de-escalation in tariff-related tension could reduce import price pressures, softening the upward momentum of US inflation and weakening the greenback.
ECB Forward Guidance and Euro Sentiment
On the European side, recent commentary from ECB officials has introduced some caution into the euro’s outlook. Boris Vujcic, a member of the ECB’s Governing Council, stated that eurozone inflation is expected to recede to the 2% target later this year. Similarly, Isabel Schnabel indicated that interest rates would remain unchanged “for a while,” reinforcing the ECB’s dovish tone.
This reinforces expectations that the ECB will remain behind the Fed in terms of tightening, which could cap further euro gains. Nevertheless, as long as core inflation in the eurozone remains stable and economic data avoids significant deterioration, the EUR/USD pair may find room for upside corrections.
Market Volatility and Risk Sentiment
Another layer influencing EUR/USD price action is the broader risk sentiment across global markets. With equity indices showing signs of hesitation and bond yields fluctuating, investors are grappling with uncertainty around interest rates, geopolitical tensions, and slowing global growth. If risk appetite weakens, the US dollar may regain strength due to its status as a safe-haven asset, potentially putting renewed downward pressure on the euro.
However, if risk-on sentiment returns—especially following a positive outcome from the US-China trade dialogue or softer-than-expected US inflation data—the euro could benefit as traders seek higher-yielding and risk-sensitive assets.
Technical Outlook: EUR/USD at Key Support
From a technical standpoint, EUR/USD has traced a notable retracement after peaking at 1.1570 in April. Last week’s decline took the pair down to 1.1215, a level that aligns with the upper boundary of a classic cup-and-handle pattern—a bullish continuation formation widely tracked by chartists.
Despite the pullback, the pair remains above the 25-day and 50-day exponential moving averages (EMAs), both of which are sloping upward, indicating sustained bullish momentum on a broader scale.
In addition, price action has shown signs of a break-and-retest pattern, particularly around the 1.1250 region. This level acted as a resistance in late March and early April and has now turned into a potential support zone, increasing the probability of a bullish bounce.
Should the rebound materialize, the next key resistance to monitor will be around 1.1350. A decisive break above this would open the door to a retest of 1.1450, followed by the April high of 1.1570. Conversely, if bearish momentum accelerates and the pair falls below 1.1215, the next major support lies at 1.1100, a level last seen in early March.
Conclusion
The EUR/USD pair is navigating a complex web of macroeconomic drivers, central bank policies, and technical chart formations. While recent retracements reflect caution ahead of high-impact US data, technical indicators and key support levels suggest the potential for a near-term rebound.
As always, risk management remains crucial. Traders should watch for confirmation signals around support areas while remaining alert to macroeconomic developments that could shift sentiment rapidly in either direction.
