EUR/USD Surges Amid Trade War, German Stimulus, and Fed Uncertainty – Where Next for the Pair?
EUR/USD has witnessed a dramatic rally, pushing above 1.0720, hitting its highest levels since November 2024 as a combination of trade war fears, economic policy shifts, and central bank speculation drives volatility. The pair is up 3.7% this week alone, marking a decisive shift in favor of buyers, as the US Dollar Index (DXY) plunges below 105.00 following fresh policy announcements from both sides of the Atlantic. The primary drivers of this move include Trump’s escalating tariff battle, Germany’s unprecedented €500 billion infrastructure plan, and the European Central Bank’s expected rate cut, all playing a pivotal role in reshaping the outlook for EUR/USD. The question now is whether this breakout has further legs or if we’re nearing exhaustion, with profit-taking likely in the short term.
Trump’s Tariff War Shakes Markets, Fueling EUR/USD Gains
The latest round of US trade policy aggression has rattled markets, injecting fresh uncertainty into the dollar. President Donald Trump imposed 25% tariffs on Canadian and Mexican imports, alongside an additional 10% tariff on Chinese goods, doubling down on protectionist policies. This move triggered immediate retaliation, with Canada and China announcing reciprocal tariffs and Mexico signaling further action. The fallout from these measures has pressured the US economy, with investors anticipating a slowdown in growth, weighing heavily on the greenback.
Adding to the uncertainty, US Commerce Secretary Howard Lutnick suggested that Trump's administration may be open to rolling back or adjusting tariffs, injecting additional volatility into an already turbulent market. While such an adjustment could provide short-term relief for the dollar, traders remain skeptical given Trump’s unpredictable approach to trade. The US dollar has tumbled across the board, and EUR/USD has capitalized on this weakness, with risk appetite returning in favor of the euro.
Germany’s €500 Billion Infrastructure Plan Revives Eurozone Optimism
One of the biggest catalysts for EUR/USD’s recent surge has been the announcement of Germany’s massive €500 billion stimulus plan, aimed at boosting infrastructure, defense, and economic resilience. With fears mounting that the US may pull back from NATO and the Western alliance, German leaders have moved swiftly to shore up European defenses, triggering a surge in demand for the euro.
The coalition agreement, led by Friedrich Merz’s Christian Democrats (CDU) along with the Christian Social Union (CSU) and Social Democrats (SPD), focuses on long-overdue investments in European security and economic infrastructure. Markets welcomed the move, seeing it as a strong signal that Germany is willing to step up its role as the economic and political anchor of the EU.
Adding to the bullish sentiment, a minerals trade agreement between the US and Ukraine has sparked fresh optimism over potential peace talks with Russia, another geopolitical factor contributing to the euro’s renewed strength.
Weak US Economic Data Further Pressures the Dollar
EUR/USD’s breakout is not just about euro strength—the US economy is showing clear signs of stress. The latest ADP Employment Change report showed only 77K new jobs in February, a dramatic slowdown from 183K in the previous month, and far below the expected 140K. This weakness in the labor market is amplifying concerns that the US economy is losing momentum, a sharp contrast to the hawkish stance the Federal Reserve has maintained in recent months.
Additionally, the RCM/TIPP Economic Optimism Index fell sharply to 49.8, missing expectations of 53.1, suggesting waning consumer and business confidence. All eyes are now on the Factory Orders report and the ISM Services PMI, which could provide further clues about whether the US economy is heading into a deeper slowdown.
Central Banks in Focus – What Will the Fed and ECB Do Next?
With market expectations shifting, traders are recalibrating their bets on monetary policy moves from both the Federal Reserve and the European Central Bank.
The Fed’s last meeting reaffirmed that rates will remain at 4.25%–4.50%, with Chair Jerome Powell insisting it’s too early to discuss cuts. However, the recent deterioration in economic data could force the Fed’s hand sooner than expected. If the upcoming Non-Farm Payrolls (NFP) report confirms further weakness, rate cut expectations could surge, potentially accelerating the EUR/USD rally toward 1.0800.
Meanwhile, the ECB is widely expected to cut rates by 25 basis points, aiming to stimulate the struggling eurozone economy. ECB President Christine Lagarde remains cautious, avoiding a larger 50bps cut, but has left the door open for further action if inflation continues to moderate.
Technical Analysis – EUR/USD Poised for Further Gains?
EUR/USD has broken out above key resistance levels, surging past 1.0720 to hit its highest level since November 2024. Price action remains firmly above the 20, 100, and 200-day SMAs, reinforcing a bullish outlook.
The Relative Strength Index (RSI) has climbed into overbought territory, signaling strong bullish momentum, though a short-term pullback could be imminent as traders take profits. The Moving Average Convergence Divergence (MACD) has also printed a fresh green bar, confirming sustained upside pressure.
Immediate resistance stands at 1.0788, a multi-month high. A break above this level could open the door to 1.0817, the 78.6% Fibonacci retracement level, with the next major target at 1.0936, the peak from November 2024.
On the downside, initial support is at 1.0675, followed by 1.0630 and 1.0590. A break below these levels would signal a deeper retracement, potentially testing the 55-day SMA near 1.0401. However, as long as EUR/USD remains above its key moving averages, the bullish trend remains intact.
Is EUR/USD a Buy, Sell, or Hold?
With market sentiment turning bullish on the euro, Germany launching massive stimulus plans, and the US dollar under pressure, the upside case for EUR/USD remains strong. The technical setup is supportive, and as long as economic data continues to weaken in the US, the euro could extend gains toward 1.0800–1.0930.
That said, short-term corrections are possible, given the overbought conditions on key indicators. Traders should watch for potential dips toward 1.0675–1.0630, which could provide buying opportunities before another leg higher.
The next few trading sessions will be crucial in determining whether EUR/USD maintains its momentum or enters a consolidation phase. A break above 1.0788 would confirm further upside, while a failure to hold above 1.0675 could trigger short-term selling pressure.
With ongoing trade disputes, central bank decisions, and geopolitical risks shaping the market, EUR/USD remains one of the most volatile and tradeable currency pairs in the current environment.
