EUR/USD Price Forecast: Short-term outlook remains bearish

EUR/USD kept the recovery well in place and maintained its course to the area above the 1.0400 level on Wednesday on the back of a marked drop in the US Dollar (USD), higher US yields and the firmer view that the Federal Reserve (Fed) will maintain its restrictive stance for longer.

The latter comes in response to higher-than-estimated US inflation figures tracked by the Consumer Price Index (CPI) in January, which once again showed stubborn prices after an uptick to 3.0% YoY in the headline print and 3.3% YoY when it comes to the core reading, that is, excluding food and energy costs.

Interestingly, this pickup in EUR/USD came despite a trifecta of potential headwinds: higher US Treasury yields, renewed trade squabbles, and Fed Chair Jerome Powell reiterating the central bank’s cautious approach to future rate changes in his second testimony on Wednesday.

Tariffs continue to steer market sentiment

President Trump’s tariff manoeuvres remain a major source of market volatility. While the planned 25% tariff on Canadian and Mexican imports was delayed, a 10% duty on Chinese goods is still in effect, rattling investor nerves. 

Initially, these uncertainties prompted traders to pare back their long-USD positions early last week, creating a brief softness in the greenback. But sentiment flipped after Trump announced a 25% tariff on all steel and aluminium imports and suggested more reciprocal tariffs were on the way. 

Even though the US Dollar’s price action remained choppy in the last few days, these protectionist moves suggest the Greenback could get a renewed boost in the near future, exposing EUR/USD to potential extra declines.

Central banks step into the limelight 

 Federal Reserve (Fed) 

- Policy Status: The Fed recently kept rates steady at 4.25%-4.50%. With solid growth, persistent inflation, and a robust job market, officials remain watchful but in no hurry to cut rates. 

- Powell’s View: During his semiannual testimony, Fed Chair Jerome Powell highlighted that strong employment (around 4% unemployment) and 4% inflation reinforce the need for caution. He stressed that cutting rates too soon could hamper efforts to rein in inflation. Any rate reductions will hinge on inflation cooling off further and the labour market staying healthy.

 European Central Bank (ECB) 

- Policy Status: The ECB cut rates by 25 basis points last week, as expected, to address sluggish growth and still-above-target inflation. 

- Lagarde’s Remarks: ECB President Christine Lagarde signalled that future rate adjustments depend on incoming data—ruling out more aggressive 50-basis-point cuts for now. She expressed optimism about taming inflation by 2025, even amid ongoing trade friction. 

 Trade war: Potential winners and losers

- US Dollar Upside: If tariffs push US inflation higher, the Fed might respond with a more hawkish stance, further lifting the Greenback. 

- Euro Vulnerability: Should the trade battle expand to the European Union (EU), the euro may face extra pressure, possibly nudging EUR/USD toward parity sooner than anticipated. 

 Technical outlook: Key price zones

- Support: The weekly low at 1.0209 (hit on February 3) remains crucial. A break lower could expose 1.0176—a year-to-date low. 

- Resistance: On the upside, 1.0532 (the 2025 high from January 27) stands as the first hurdle, followed by 1.0629 (December’s peak) and the 200-day Simple Moving Average near 1.0750. 

- Indicators: While the Relative Strength Index (RSI) has climbed near 50, hinting at improving momentum, the Average Directional Index (ADX) is around 17, suggesting the current trend may be weakening.

EUR/USD daily chart

Where does the Euro go next? 

Looking ahead, EUR/USD faces a tough balancing act. The ongoing tariff saga, diverging policy paths at the Fed and ECB, and sluggish growth in the eurozone—particularly in Germany—create a challenging backdrop. 

Short-term pops in the exchange rate are possible, but until global uncertainties clarify, the pair’s broader direction will likely remain murky. Economic data and trade headlines could swing sentiment quickly, making vigilance key for traders and investors alike.