EUR/USD forecast: Currency Pair of the Week – February 4, 2025

The EUR/USD has been able to rally at the start of this week, despite Trump’s trade tariffs and uncertainty over Ukraine. This pair will remain in sharp focus for these reasons alone, but also have the ECB rate decision and key data from the US to look forward to as well. The EUR/USD forecast is therefore subject to great uncertainty, but for now it looks like the path of least resistance is to the upside.

Mexico, Canada, and China tariffs go into effect but what about Europe?

Tariffs remain a key theme in the background. The postponed levies on Mexico and Canada, alongside fresh tariffs on China, took effect at midnight. Judging by how the FX markets have reacted, it looks like tariffs were already priced in. What’s more, the retaliatory tariffs from Canada and China may also hurt the dollar. Meanwhile, the fact that oil prices fell, this may also have helped the likes of the euro and yen, with the Eurozone and Japan being net oil importers. There is also an argument that if more signs of economic weakness emerge from the US, Trump may be forced to take a less aggressive policy path. All these factors have helped to fuel a recovery in the EUR/USD to above 1.0500 handle today and some.

Investors will be watching Trump’s address to Congress for hints on future steps, with the EUR/USD traders wanting to know exactly what he is planning on Europe in terms of tariffs, which is a big unknown right now.

Ukraine peace deal still on the cards

The EUR/USD’s recovery comes after political drama in Washington late on Friday sent the pair tumbling to a session low of 1.0360, marking a second consecutive weekly decline. The recent optimism surrounding a potential peace deal for Ukraine, which had bolstered the euro, faded sharply after a heated exchange between Volodymyr Zelensky and Donald Trump in the Oval Office. As Trump abruptly dismissed the Ukrainian president with the ultimatum to "make a deal or we're out," market sentiment swiftly adjusted, reducing expectations of a swift resolution.

But at the start of this week, the EUR/USD has been on the rise again, amid renewed optimism for a peace deal in Ukraine after Zelensky met with European leaders and Trump signalled a deal could still happen even if he ordered a pause to all military aid to the country to put pressure on the Ukrainian president.

Focus turns to macroeconomics: ECB, US ISM PMI and NFP report

We've already seen the release of some crucial economic data at the start of this week, with a fresh wave of high-impact reports on the horizon that could significantly impact the EUR/USD forecast.

Slightly hotter Eurozone CPI won’t stop the ECB cutting rates

On Monday, the Eurozone CPI flash estimate surprised to the upside, boosting the EUR/USD forecast. The headline figure came in at 2.4% year-on-year, slightly above the forecasted 2.3%, while core CPI held steady at expectations, registering 2.6% year-on-year. The main takeaway here is that this data is unlikely to shift the European Central Bank’s stance when it meets later this week on Thursday. That said, if inflation continues to hover above target, it could shape rate decisions as we move deeper into the year. 

The ECB is engaged in an internal debate over how far to push its rate-cutting cycle. Dovish policymakers are advocating for a policy rate of 2% by summer, while the hawks remain wary of cuts below 2.5%. However, a 25-basis point rate cut appears likely, bringing the benchmark rate down to 2.65% from 2.90%. Given persistent inflationary pressures and sluggish economic growth, the ECB must tread carefully—particularly in light of the looming US tariffs. Investors will also pay close attention to ECB President Christine Lagarde’s remarks at the press conference, as her guidance on future policy direction could move the euro.

US data set to take centre stage: ISM and NFP among others

Looking further ahead, the ISM Services PMI and ADP employment report will serve as appetisers ahead of Friday’s highly anticipated US payroll data.  Meanwhile in China—the world’s second-largest economy—the annual "Two Sessions" meeting is also on the agenda, with expectations of fresh stimulus measures, which could have a significant impact on risk sentiment.  We will cover the upcoming US data in greater detail later today, but for now let’s look at the chart of the EUR/USD as it is breaking some key levels…

Technical EUR/USD forecast: Key levels to watch

Source: TradingView.com

As for the technicals are concerned, well the EUR/USD chart has been getting rejected from resistance at around the 105.00 area repeatedly in recent weeks, and it is where price turned lower from midway through last week. However, support emerged at a rising bullish trendline, fuelling a strong rally yesterday and some continuation so far today—likely aided by Europe’s hotter-than-expected inflation figures that were released the day before and optimism that a deal for Ukraine could still be reached.

Anyway, some key levels to monitor for the EUR/USD this week include the 105.00 area which now needs to hold on any dips to keep the bullish momentum alive, else, a revisit of 104.00 could be on the cards. Now that we have broken above that 1.05 level, this may well have paved the way for a move towards 106.00, potentially 107.00 thereafter.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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