EUR/USD outlook: Currency Pair of the Week – February 18, 2025

The EUR/USD remained slightly undermined after it eased back below the 1.05 handle on Monday following last week’s rebound linked to optimism about the potential end of Ukraine conflict. Though it hasn’t fallen off a cliff, the lack of any upside follow through must be frustrating for the bulls to say the least. In any case, the downside should be limited in the short term outlook as negotiations continue over Ukraine. Should Russia and Ukraine eventually strike a peace deal, the dollar may well face another correction. However, for now, markets are lacking any concrete bearish drivers for the greenback, which has allowed it to stage a bit of recovery along with bond yields. Still, the near-term EUR/USD outlook has improved, and I think the risks are now skewed to the upside for the pair, which I think is still heading north of the 1.05 handle in the coming days.

EUR/USD outlook boosted by improving German investors sentiment

Today’s only piece of data from the Eurozone came out stronger with the German ZEW Economic Sentiment climbing to 26.0, compared to 10.3 previously and 19.9 expected. This is based on a survey of about 160 German institutional investors and analysts, rating the relative 6-month economic outlook for Germany. Therefore, it is a leading indicator of economic health, with the rationale being that investors and analysts are highly informed and changes in their sentiment can be an early signal of future economic activity. The fact that this was the strongest increase in ZEW indicator for Germany in the past two years is noteworthy.

It is likely that their optimism reflects the recent performance of the flying German DAX index and European markets in general, which in turn have been supported, in part, by the view that the Ukraine conflict may end soon, and that the ECB is also going to cut rates.

ZEW President Achim Wambach said: “This rising optimism is probably due to hopes for a new German government capable of action. Also, after a period of absent demand, private consumption can be expected to gain momentum in the next six months. And the recent move by the ECB to cut interest rates in response to sluggish economic activity in the Monetary Union is likely to have contributed to the better outlook for the construction industry.”

What about tariffs?

Well, the impact of tariffs could come back to bite the EUR/USD once the focus shifts away from the Ukraine peace negotiations in the coming weeks. Right now, the currency pair is erasing the negative risk premium tied to the Ukraine war, with the peace negotiations appearing to offset the tariff threat in FX markets. However, the latter is likely to have more tangible implications for the ECB, the economy, and, by extension, the euro, in the coming months. For now, though, markets are not focusing much on this, and the ongoing risk-rally is helping to keep the euro’s downside limited.

US dollar in consolidation mode amid lack of data

The US dollar index is bouncing back slightly after a two-week drop and a flat performance in January, which ended a three-month winning run. It remains to be seen whether the recent retreat was just a correction for the dollar and whether that has now largely played out. But there’s still some scope for a risk-on, dollar-off, move should a Russia-Ukraine peace agreement materialise.

Last week’s hotter inflation data failed to lift the US dollar, which suggests the dollar may have already priced in upside risks to inflation, owing to Trump’s protectionist policies. There are no major US data this week, and it remains to be seen whether tomorrow’s FOMC minutes will be a market moving event. Today’s Empire Manufacturing index should have minimal market impact.

Later this week, the global PMIs are scheduled for Friday, which may impact the EUR/USD outlook. The European PMIs are likely to show modest improvement, with the services Sector PMI seen printing 51.5 vs. 51.3 last and Manufacturing PMI expected to have improved to 48.5 from 48.3, remaining below the expansion threshold of 50.0. The recent upsurge in major Eurozone indices such as the DAX suggests investors are expecting recovery to gather pace, but will this be evidenced in the latest PMI readings showing even better results than those expected by economists?

Technical EUR/USD outlook: Key levels to watch

Source: TradingView.com

The technical EUR/USD outlook improved last week with the pair printing a large bullish candle, after establishing support around the 1.0300 level earlier in the week. The pair has since been trying to break key resistance in the 1.0480–1.0500 zone, where it has encountered some pushback. Still, the recent higher lows indicate some buying interest, even if the broader technical outlook has not yet turned decisively bullish. We would be more confident in expecting higher levels on the back of some further bullish price action. For me, a decisive break above the 1.0480–1.0500 range could suggest a shift in sentiment. If that happens, we could see follow-up technical buying towards the next potential resistance levels of 1.0600 and possibly even 1.0700 thereafter.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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