EUR/USD Weekly Forecast: US Dollar corrects oversold conditions, tensions remain the same

• The US Federal Reserve kept the benchmark interest rate unchanged, as expected.
• Germany’s spending boost passed Congress and provided support to the Euro.
• EUR/USD could correct further south once below the 1.0800 threshold.

The EUR/USD pair shed some ground in the week, but not before reaching a fresh multi-month high of 1.0954. It settled closer to the 1.0800 threshold, as the US Dollar (USD) ended up benefiting from the Federal  Reserve (Fed) monetary policy announcement.

Federal Reserve maintains the status quo

The Greenback started gathering momentum early on Wednesday, as markets turned cautious ahead of the central bank’s announcement. The USD seesawed between gains and losses within the decision but ended up surging amid prevalent trade-war global concerns and extreme oversold conditions forcing some profit-taking.

As widely anticipated, the Fed kept its benchmark interest rate between 4.25% and 4.50%, and still foresees two rate cuts coming in 2025. Officials also announced they would scale the quantitative tightening program. The Fed will now allow just $5 billion in maturing proceeds from Treasuries to roll off each month, down from $25 billion. It left a $35 billion cap on mortgage-backed securities unchanged.

“Uncertainty around the economic outlook has increased,” the accompanying statement read. “The Committee is attentive to the risks to both sides of its dual mandate.”

The Summary of Economic Projections (SEP) or dot plot showed that policymakers altered their views on growth and inflation, seeing the first lower and the second higher.

However, Chairman Jerome Powell said that less economic growth and higher inflation in 2025 somewhat offset each other after noting that a good part of higher inflation expectations comes from tariffs. Finally, he noted that the impact of tariffs on inflation could be “transitory,” bringing a bit of relief to financial markets.

“We’re not going to be in any hurry to move,” Fed Chair Powell added.

 Germany takes centre stage in Europe

The Euro (EUR), on the other hand, benefited from headlines coming from Germany throughout the first half of the week.  The head of the Social Democratic Party (SDP) Lars Klingbeil, addressed the Bundestag to unlock up to €1 trillion in new spending to boost the country’s defence and invest in infrastructure on Monday.

 The  German Bundesrat, the upper house of parliament, voted for a major fiscal package on Tuesday, with 513 votes in favor and 207 votes against. The reform includes changes to the long-standing debt brake rule and a €500 billion infrastructure and climate fund. The package still needs additional approvals, yet plans are moving in the right direction.

It’s worth adding, however, that Germany’s need to boost defence and infrastructure spending is a response to the decision of the United States (US) President Donald Trump to retrieve support for Ukraine in its war against Russia.

Geopolitical woes weigh on sentiment

Geopolitical jitters added to the market’s dismal mood. On the one hand, Israel resumed its military offensive in the Gaza Strip, ending the ceasefire amid claims that Hamas did not release the remaining hostages.

On the other hand, US President Trump spoke with his Russian counterpart, Vladimir Putin, and also with Ukrainian leader Volodymyr Zelenskyy, about a partial ceasefire in the Russia-Ukraine war. Russia agreed to halt attacks on energy plants but continued to launch massive drone attacks on its neighbour country. Tensions between the two nations continue despite efforts from Trump, who keeps pursuing taking advantage of rare mineral production in Eastern European countries.

Ukraine and the US agreed on a comprehensive agreement to develop Ukraine's critical mineral resources as soon as possible. In fact, Trump said a deal will be signed “very shortly.” Rare minerals are used in the manufacturing of electronics, batteries and magnets, among other things. Additionally, Trump offered to take over Ukrainian nuclear power plants to “protect” them. The idea surprised Kyiv authorities and Zelenskyy rejected it, claiming that nuclear plants were state-owned and could not be privatized.

Macroeconomic calendar hitting up

Data coming from the US was mixed yet scarce. Retail Sales were up a modest 0.2% in February, missing expectations of 0.7%. The NY Empire State Manufacturing Index plunged to -20 in March from the previous 5.7. However, weekly unemployment claims were slightly better than anticipated, printing at 223K, while the Philadelphia Fed Manufacturing Survey improved to 12.5 from 18.1 in February.

The German ZEW Survey showed a better sentiment, although persistent concerns about the current situation. The index surged to 51.6 in March from 26 in February,  while for the EU, it came in at 39.8 in March versus 24.2 in February. The Current Situation Index improved to -87.6 in the same period, slightly better than February’s -88.5 but below the expected -80.5.

Additionally, the EU confirmed the Harmonized Index of Consumer Prices (HICP) at 2.3% YoY in February, slightly below the preliminary estimate of 2.4%.

 In the upcoming days, the macroeconomic calendar will be a bit more interesting. The Hamburg Commercial Bank (HCOB) and S&P Global will release the preliminary estimates of the March Purchasing Managers’ Index (PMI) for all major economies.

Multiple US Fed officials will be on the wires, given that the blackout period ended with the Fed’s announcement.

The US will release the final estimate of the Q4 Gross Domestic Product (GDP), expected to be confirmed at 2.3%, February Durable Goods Orders, and the Personal Consumption Expenditures (PCE) Price Index for the same month.

EUR/USD technical outlook  

The EUR/USD pair met sellers for a second consecutive week in the 1.0950 neighborhood and seems poised to correct lower, although the bearish potential remains well-limited. The weekly chart shows the pair is battling around a mildly bearish 200 Simple Moving Average (SMA), still unable to break above it. At the same time, EUR/USD develops well above directionless 20 and 100 SMAs. Technical indicators, in the meantime, remain within positive levels, although they have lost their upward strength.

Technical readings in the daily chart offer a similar picture. The EUR/USD pair develops above all its moving averages, with a firmly bullish 20 SMA about to cross above a flat 200 SMA after largely surpassing an also directionless 100 SMA. Technical indicators, in the meantime, corrected extreme overbought conditions and head south within positive levels, still far above their midlines.

The 1.0800 threshold is the immediate support ahead of the aforementioned 200-day SMA, followed by December’s peak at 1.0629. A run beyond 1.0890, on the other hand, exposes the psychological 1.1000 mark, ahead of the 1.1080 region. Further gains should open the door for a test of the September 2024 high at 1.1213.