EUR/USD analysis: Dollar remains in driving seat

• EUR/USD analysis: FX investors tilting in favour of a stronger dollar as US data continues to outperform
• Nonfarm payrolls are delayed by the government shutdown, complicating things a little
• EUR/USD is drifting closer to key technical zone around 1.1750

 

After reversing its entire gains from early last week, the EUR/USD has drifted further lower at the start of this week, to approach a key technical area near 1.1750 zone. The pair has taken a hit mainly because of a rebounding US dollar on the back of surprisingly strong US data and Trump’s nomination of a Fed chairman who is not exactly dovish. To a lesser degree, the dollar was also supported by the ~$8.50 (or 14.5%) rise we saw in oil prices in January, which wasn’t particularly good news for energy-importing economic regions like the eurozone. With the US economy proving to be a little more resilient than markets were previously expecting, investors have marginally reduced their expectations on US interest rate cuts. Meanwhile, the EUR/USD’s recent strength has started to unnerve the ECB about the potential for inflation to undershoot their target, which thereby increases the probability of a rate cut. Against this backdrop, our EUR/USD analysis and forecast remain modestly bearish for the pair, but further forecast-beating US data is needed to convince traders that the US dollar recovery has some staying power this time around.

 

US government shutdown delays crucial data

 

From a macro perspective, US growth is proving more resilient than many had anticipated going into the year. We have seen US bond yields remain elevated, which continues to favour the dollar over currencies where the central bank if neutral or still dovish. At this stage, unless we get a clear negative catalyst for the US economy, it’s hard to build a convincing bearish case, even if some pairs are continuing to show relative strength – for example the AUD/USD. The only real complication is the partial US government shutdown, which is going to delay the release of Friday’s non-farm payrolls and today’s JOLTS data. This removes some near-term event risk from the calendar, but this may, arguably, help the dollar on the margin, as the market would need weak data to justify pushing the USD materially lower. Not having that data at all keeps the current USD-positive narrative intact.

 

The only major data we have had so far this week was released yesterday – and it was quite good. Specifically, it was the ISM manufacturing index, which jumped back into expansion territory at 52.6. This was the first expansionary reading in a year and the strongest since August 2022. That is a signal that US manufacturing momentum is improving, with production, new orders and order backlogs all pointing to solid forward activity.

 

There is also a decent chance the shutdown is resolved quickly, with a House vote expected soon. For the remainder of this week, we will have ADP employment and ISM services will still be released on Wednesday, so it’s not as if the macro picture goes completely dark.

 

Not much from Eurozone until ECB presser

 

On the euro side, there’s not much to get excited about fundamentally – although we will have the European Central Bank rate decision, and more importantly, Christine Lagarde’s press conference coming up on Thursday. There, the ECB President may show some verbal discomfort about the recent strength of the euro, although with the euro softening in the past few days, that effectively does some of the work for them.

 

Meanwhile, France has finally passed its 2026 budget after another confidence vote. Political stability is a net positive for markets, and this has been reflected in the European markets recovering nicely, and the France-Germany 10-year spread tightening. The FX markets have ignored the developments, however, as the focus remains pretty much on the dollar side of the equation for the EUR/USD analysis.

 

Technical EUR/USD analysis

 

 

In this technical EUR/USD analysis section, I have included a daily chart of the pair, above. As you can see, the the EUR USD exchange rate has been falling in recent days, losing its prior bullish momentum.  It has also broken a couple of levels that the bulls would argue should have held as support, including the September 2025 high of 1.1919. Now, the EUR/USD is testing another major inflection point between 1.1750 to 1.1800 area. Here, the top side of the broken resistance trend meets the 21-day exponential average and the prior resistance region. So far, the bulls have managed to hold their ground here. They will need to continue doing that in the coming days to prevent a complete reversal. While the pair holds its own above here, it is important not to turn aggressively bearish, given that the underlying trend has been bullish since last January.

 

Indeed, any signs of a bullish reversal could see the pair bounce back quickly. Initial resistance is at 1.1850, then around the 1.1900/20 area. Above that would expose 1.20 handle for another test.

 

If EUR/USD starts slipping further lower instead, then the technical narrative would start to turn bearish if 1.1750 breaks. Below that, stops resting below the January low of 1.1578 could be in trouble, potentially leading to an eventual drop to 1.1500 area.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R