EUR/USD forecast: Euro eases on Trump’s tariffs threat but Ukraine optimism remains key driver

The EUR/USD slipped on Wednesday morning, edging closer to the 1.04 handle as it extended its retreat from last week’s gains. There was no clear catalyst behind the weakness, aside from US President Donald Trump raising the prospect of tariffs of up to 25% on automobile, semiconductor, and pharmaceutical imports. European markets followed suit, with the DAX pulling back sharply after hitting a fresh record high, dragging US futures lower in the process.  That said, the EUR/USD is not experiencing a sharp sell-off, as it continues to unwind the negative risk premium associated with the Ukraine war. With peace talks ongoing, the tariff threat has yet to weigh significantly on FX markets. However, in the months ahead, the implications for the ECB, the broader economy, and the euro could be far more pronounced. For now, though, markets appear only a little concerned, and the recent risk-on rally is keeping the EUR/USD forecast skewed slightly to the upside.

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 by the Ukraine peace negotiations, which is euro-positive.

The EUR/USD’s rather underwhelming performance this week follows a solid rally last week, fuelled by optimism over a potential resolution to the Ukraine conflict. While it hasn’t plunged, the lack of sustained upward momentum will no doubt be frustrating for the bulls. That said, the downside appears somewhat contained in the near term, with negotiations over Ukraine still ongoing. 

Should Russia and Ukraine ultimately reach a peace agreement, the dollar could well come under renewed pressure. For now, however, there are few clear-cut bearish catalysts for the greenback, allowing it to stage a modest rebound alongside bond yields. Even so, I believe the risks remain tilted to the upside for the pair, with a move beyond the 1.05 handle still on the cards in the days ahead.

US dollar in consolidation ahead of FOMC minutes

The US dollar index is staging a modest rebound following a two-week decline and a flat January, which marked the end of a three-month winning streak. Whether the recent pullback was merely a correction or something more sustained remains to be seen. That said, should a Russia-Ukraine peace deal come to fruition, there is still room for a broader risk-on, dollar-off move. 

Notably, last week’s hotter-than-expected inflation figures failed to lift the greenback, suggesting that markets may have already priced in inflationary risks stemming from Trump’s protectionist stance. With no major US data releases scheduled this week, attention turns to today’s FOMC meeting minutes, though it is unclear whether they will provide a significant market-moving catalyst. 

Later in the week, global PMI figures are set for release on Friday, potentially influencing EUR/USD forecast. The European PMIs are expected to show modest improvement, with the services sector reading forecast at 51.5, up from 51.3, and manufacturing seen rising to 48.5 from 48.3—though still below the 50.0 expansion threshold. The recent surge in major Eurozone indices, such as the DAX, suggests investor optimism over a recovery, but the question remains: will the PMI figures confirm an even stronger rebound than economists anticipate?

Technical EUR/USD forecast: key levels to watch

Source: TradingView.com

The EUR/USD remains rangebound, but if last week’s price action is any guide, dip-buying could emerge as the pair tests support in the 1.0400–1.0430 region. Having established a floor last week, the euro has since attempted to push through key resistance at 1.0480–1.0500, though it has encountered some selling pressure at those levels. Even so, the formation of higher lows suggests there is buying interest, despite the broader technical EUR/USD forecast remaining uncertain. 

For now, I would like to see further bullish price action before expecting a more sustained move higher. A decisive break above the 1.0480–1.0500 range could indicate a shift in sentiment, potentially triggering follow-through buying towards the next resistance levels at 1.0600 and, if momentum builds, even 1.0700.

All told, I am expecting to see a rally above 1.05 handle, than, say, a breakdown below 1.02 support first.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R