EUR/USD forecast: Key risk remains tariffs as focus momentarily shifts to data

The first half of Wednesday’s session saw the US dollar continue to edge lower alongside bond yields, a move sparked by Trump’s decision on Monday to delay tariffs on the USA’s northern and southern neighbours. Since then, weaker-than-expected JOLTS job openings and factory orders data from the US have added further pressure on the dollar. Some of the biggest beneficiaries of this dollar weakness have been the currencies of nations previously at risk of steep tariffs, including the Canadian dollar, the euro and currencies which have strong relations with China – such as the antipodean dollars. While it may be up for the third consecutive day now, the medium-term EUR/USD forecast is not yet completely positive. After all, the Eurozone is subject to prolonged trade negotiations with the Trump administration. What’s more, a dovish-leaning ECB could cause European bond yields to remain relatively lower compared to the US, where the Fed is seen keeping policy steady for the next several policy meetings.

Tariff delays remain dominant force as attention turns to data

Trump’s last-minute decision to delay 25% tariffs on Canada and Mexico, following discussions with their leaders, triggered a sharp reversal in the US dollar. The news also buoyed risk assets and provided some much-needed relief for the euro.

Meanwhile, markets are viewing Trump’s declared intention to take control of the Gaza Strip and relocate Palestinians to neighbouring countries with a degree of scepticism. However, any indication that the US is preparing to deploy troops in the Middle East could have notable market implications—likely triggering a risk-off move, supporting oil prices, and weighing on the EUR/USD, as Arab nations would almost certainly push back against such a development.

That is something to keep an eye on, but for now, market focus shifts to incoming data, with ADP private payrolls and ISM services PMI set for release today. The ADP employment figures for January are expected to show a slight improvement from December at 150k. Meanwhile, the ISM services survey will be the day’s data highlight, with consensus pointing to a steady reading around 54. However, the real focus should be on the prices paid subindex, which surged to 64 in December, reigniting inflation concerns. Let’s see if prices have since subsided and by how much.

From the data front, the real test – one that could impact the EUR/USD forecast – comes on Friday, when the US unveils its official jobs report, potentially sparking fresh volatility. That said, the biggest wildcard remains Trump’s unpredictable protectionist tweets and off-the-cuff remarks, which could upend sentiment in an instant.

China and EU tariffs are the real risk for EUR/USD forecast

The US trade tariffs spotlight is now shifting towards China, with Beijing’s measured response to Trump’s tariffs keeping markets hopeful for a deal before China’s retaliatory tariffs take effect on 10 February. While a US-China agreement remains the most likely outcome, markets may be underestimating the risk of a prolonged trade dispute. Unlike tariffs on Canada and Mexico, those on China have less immediate impact on US consumers and producers, giving Trump room to negotiate at his own pace.  The dollar has some room to correct lower on US-China trade optimism, but markets appear to be discounting alternative scenarios. That said, the uncertainty surrounding tariffs makes a sustained dollar decline unlikely.

Meanwhile, the euro remains fundamentally weak, and Trump has hinted the EU could be next in line for tariffs.  With a quiet eurozone calendar for the rest of the week, trade developments will drive EUR/USD price action. Any shift in the ECB’s tone following slightly hotter-than-expected inflation figures will also be worth watching.

EUR/USD technical analysis

Source: TradingView.com

The EUR/USD seems to have formed a near-term low around the 1.02 handle, with rates now failing to break decisively below this level for the third time of asking. Consequently, the short-term selling pressure has waned, and the 21-day exponential average has flatlined. I would expect this basing to continue for a while until some solid fundamental stimulus either lifts this pair decisively higher or lead to further losses towards parity. Key resistance remains around the 1.0500 handle, with 1.0430 also an interesting level to watch. Short-term support levels include 1.0387 and 1.0350, the highs from the previous couple of days.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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