EUR/USD Update: Bullish Bias Returns Amid Growing U.S. Dollar Weakness

The EUR/USD has risen by more than 1.8% from its low recorded on February 10, when it was holding in the 1.02858 zone. This rebound is primarily due to the defensive stance adopted by the market, which favors the euro in the short term amid speculation about the Federal Reserve’s future decisions following this week’s inflation data release. Additionally, the uncertainty generated by the reciprocal tariffs announced by Trump has led the market to consider a potential negative impact on the U.S. economy, further weakening confidence in the U.S. dollar.

Central Bank Outlook

On one hand, the European Central Bank (ECB) maintains a long-term outlook of low interest rates to reach its 2% inflation target. According to recent statements from the Governor of the Croatian National Bank, Boris Vujcic, the ECB could cut interest rates up to three times in 2025 to move closer to this goal.

On the other hand, the Federal Reserve has maintained a neutral stance, intending to keep interest rates at 4.5%. However, the recent release of the U.S. Core PPI, which registered a 0.3% monthly increase—below the previous 0.4%—has been interpreted by the market as a sign of inflation moderation. This has sparked speculation that the Fed may start considering interest rate cuts in the short term, weakening the DXY Index, which measures the strength of the U.S. dollar. The index has fallen by 0.5% in recent hours, approaching 106 points.

The recent decline in the DXY Index can be attributed to the possibility that if the Fed adopts a more dovish stance on interest rates, U.S. Treasury yields could lose appeal, reducing demand for dollars and increasing upward pressure on EUR/USD.

Now, this new outlook for lower interest rates does not seem to fully align with CME Group’s probability charts, which currently estimate a 97.5% chance that the interest rate will remain at 4.5% at the March 19 decision. For the May 7 meeting, the probability of rates remaining unchanged stands at 81.5%

Interest Rate Probabilities - March (CME Group)

Source: CME Group

Interest Rate Probabilities - May (CME Group)

Source: CME Group

Given this, it is possible that the recent market reaction is based on temporary speculation, and next week’s release of the Fed minutes will be key in assessing whether the central bank is genuinely considering a shift in its monetary policy. If the Fed maintains its current stance, the recent downward pressure on the U.S. dollar could begin to fade, jeopardizing the bullish bias in EUR/USD.

Finally, both central banks have indicated a downward trend in interest rates for several months. However, the Fed currently holds its rate at 4.5%, significantly higher than the ECB’s 2.9%, which could be further reduced in upcoming meetings.

Fed vs. ECB Interest Rate Comparison

Source: Tradingeconomics

As long as this interest rate differential persists, U.S. Treasury yields will continue offering higher returns, making it harder for the euro to sustain demand levels above the dollar. In the long run, this yield spread could be a key factor in maintaining downward pressure on EUR/USD, favoring the U.S. dollar.

EUR/USD Technical Outlook

Source: StoneX, Tradingview

• A new trend emerges: Since January 13, the bullish bias has managed to break key levels, giving rise to an emerging uptrend in the EUR/USD chart. However, the price is currently facing key resistance at 1.04870. If it fails to surpass this level, the uptrend could lose momentum, casting doubt on the recent upward movement.

   

• TRIX: The TRIX line has maintained a steady upward slope and is approaching the neutral level of 0. This indicates that the average of the past 18-period moving averages has shown sustained growth, supporting short-term bullish pressure. If the TRIX line remains above the neutral level, EUR/USD’s bullish momentum could become more significant.

   

  Key Levels:

   

• 1.03733: Key support, aligned with the midpoint of the short-term sideways channel and the 50-period moving average. If the price returns to this level, it could reactivate bearish pressure, pushing the pair back into its previous sideways range.

   

• 1.04870: Key resistance, corresponding to the late-January highs. If the price surpasses this level, the bullish bias could strengthen, supporting the consolidation of EUR/USD’s new uptrend.

   

• 1.05864: Distant resistance, aligned with the 100-period simple moving average and the Ichimoku cloud’s last barrier. If the price reaches this zone, it would confirm the bullish sentiment, paving the way for more significant upward movements.

Written by Julian Pineda, CFA – Market Analyst