The EUR/USD currency pair, after hitting a six-week high of 1.0535 on Monday, has faced a downward trend, falling to a low of 1.0365 by Friday. This week has been marked by significant economic events, including meetings of the Federal Reserve (Fed) and the European Central Bank (ECB), key economic indicators, and important political statements that have collectively contributed to the pair’s decline.
EUR/USD Falls Amid Growing Divergence Between Fed and ECB
The Federal Reserve, as anticipated, kept its interest rates unchanged and failed to communicate any plans for future cuts, which bolstered the U.S. Dollar in the Forex market. Assertion from the Fed officials was largely considered cautious, leading to a drop in the probability of a rate cut for the March FOMC meeting, from 28% to 14%, according to CME’s FedWatch tool.
In stark contrast, the European Central Bank decided to lower its rates—a move many had anticipated. However, comments accompanying the decision left the door open for further cuts, exerting downward pressure on the Euro.
This week has also seen multiple tariff threats from U.S. President Donald Trump, who reiterated plans to increase customs duties by 25% on goods from Mexico and Canada, effective Saturday.
This could reignite inflation and diminish the chances of the Fed adopting a lower rate strategy, which would be favorable for the Dollar while raising concerns that Trump may soon take similar actions against Europe, further negatively impacting the Euro.
On the economic calendar front, the most significant indicator of the week, the U.S. Core PCE Price Index, met expectations with a monthly increase of 0.2% and an annual increase of 2.8%. This remains well above the Fed’s official inflation target, indicating reduced likelihood for rate cuts.
In summary, the events of this week point to increasing divergence between the policies of the Fed and the ECB, a scenario that is inherently unfavorable for the EUR/USD pair.
Euro May Collapse Only If Breach of Key Support Occurs
However, from a technical perspective, the Euro-Dollar pair has yet to exhaust its potential. The currency pair is still above the extended downward trend line that it broke through last Friday.
Currently, the EUR/USD faces significant support in the 1.0350 zone. A breach of this level would realign the pair with its previous downward trajectory, with subsequent targets at 1.03, 1.02, and the January 13 low at 1.0175. Conversely, resistance levels to monitor include 1.04, 1.05, and the peak of 1.0535 from Monday.
The bullish reversal that seemed to be forming on Monday is no longer in play for the EUR/USD. However, the trend is not clearly bearish either, and the proximity to a key support level opens the potential for a rebound, contingent upon forthcoming catalysts.
In that regard, the next significant event expected to influence the Euro-Dollar exchange rate will be the upcoming U.S. Non-Farm Payroll (NFP) report, scheduled for release next Friday. Disappointing figures could reignite expectations among investors regarding a potential dovish shift by the Fed, which would favor a rebound of the Euro-Dollar pair.
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