EUR/USD forecast: Ukraine war optimism countered by reciprocal tariffs fears

The EUR/USD eased off its earlier highs and moved back below 1.04 handle as risk sentiment wobbled a little just before midday in London after Donald Trump took to social media with an all-caps declaration that today is the big one: reciprocal tariffs. It remains to be seen what those tariffs would look like, and which countries and sectors are targeted. Despite struggling today, the EUR/USD forecast has improved a little, owing to optimism about the end of Ukraine war. PPI and jobless claims are up next.

TODAY IS THE BIG ONE: RECIPROCAL TARIFFS

That is what Trump posted, which rattled markets a little, though the US president then attempted to soften the impact by striking an optimistic tone on efforts to end the Ukraine war. Let’s see what those measures will be and how the markets will react to them. Judging by Trump’s other tariff threats, markets have so far taken them as merely a negotiating ploy than anything else.

Earlier in the session, the euro had already pared some of its gains, with caution creeping in following comments from EU leaders. Estonia’s Prime Minister Kaja Kallas warned against premature concessions, stating that "Not good tactics to give things away before negotiations have started, appeasement won’t work."  She reinforced Europe’s commitment to Ukraine, adding that if Kyiv chooses to continue resisting, "Europe will come up with new initiatives to support it.

Ukraine optimism reduces downside risks to EUR/USD forecast

Still, European markets were mostly still in the green, holding onto earlier gains, on renewed optimism surrounding the Ukraine conflict. Energy stocks came under pressure as oil prices extended their decline, while yesterday’s hotter-than-expected US CPI inflation data kept yields elevated, tempering enthusiasm for growth stocks.

Yesterday, markets responded positively to President Donald Trump’s discussions with Russian President Vladimir Putin, in which both leaders agreed to initiate talks aimed at ending the Ukraine war. While no concrete agreements have been reached, the mere fact that negotiations are beginning has been reflected in European asset pricing. A potential resolution could significantly ease war-related costs, particularly in the energy sector, while reducing uncertainty and improving business confidence—an outcome that would be especially beneficial for Europe’s largest economies, and by extension the euro. 

PPI inflation in focus as rising yields keep dollar bears at bay 

Attention now turns to PPI inflation and jobless claims data, with retail sales figures due on Friday. PPI inflation is expected to ease to 3.2% year on year from 3.3% but rise 0.3% month on month, up from 0.2% in December. Jobless claims are seen little changed from the previous week’s reading of 219K.

For the EUR/USD, it is optimism over Ukraine which has partially offset disappointment over fading hopes for imminent interest rate cuts from the US, that is helping to keep the pair in a holding pattern. Yesterday’s consumer price inflation data surprised to the upside, pushing bond yields higher and prompting markets to push back expectations for a rate cut to December. Fed Chair Jay Powell reiterated that more work remains to be done on inflation, reinforcing the view that policymakers are in no rush to ease monetary policy. 

EUR/USD technical analysis

Source: TradingView.com

After establishing support around the 1.0300 level earlier this week, the EUR/USD is now testing key resistance starting in the 1.0430 area to around 1.0500 area. Last week, the EUR/USD found a solid floor near 1.0200, a level it had last tested – and held above – in early January. While these higher lows suggest some buying interest, the broader technical picture remains bearish, with moving averages still pointing lower and price action contained within a larger structure of lower lows and lower highs. Given this backdrop, the recent rebound appears to be more of a corrective bounce rather than the start of a sustained trend reversal.  Therefore, more bullish action is needed before we become tactically bullish on the EUR/USD forecast. Specifically, a potential break above that 1.0430-1.0500 range could signal a shift in sentiment, but for now, caution is warranted as the pair continues to trade within its prevailing downtrend.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

1. Open an account, or log in if you’re already a customer 
   
   • Open an account in the UK
   • Open an account in Australia
   • Open an account in Singapore
   
   
2. Search for the company you want to trade in our award-winning platform 
3. Choose your position and size, and your stop and limit levels 
4. Place the trade