- The German election results initially boosted optimism, but uncertainty over coalition talks is keeping pressure on EUR/USD.
- Trump's confirmation of tariffs on Mexico and Canada increased safe-haven demand, supporting the US dollar's recovery.
- US PCE inflation data and growth figures will be key market drivers, while Germany’s coalition developments could influence euro movements.
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EUR/USD remained stable after the German elections but could not hold onto its gains. Although the conservative CDU/CSU bloc won, uncertainty about the formation of a coalition government influenced the currency pair's movement.
Meanwhile, US President Donald Trump confirmed that tariffs on Canada and Mexico would proceed as planned, boosting the Dollar. This led some market participants to increase their demand for the dollar as a safe-haven asset.
Uncertainty Over Coalition Talks Weighs on EUR/USD
In Germany's national elections, the conservative CDU/CSU bloc led with 28.5% of the vote, while the far-right AfD secured 20.5%, placing second. However, coalition talks are complicated as other parties have ruled out working with the AfD. The most likely outcome is a CDU/CSU-led government with the SPD, despite the latter's weak performance, but the process could take time.
Uncertainty over coalition negotiations also dampens expectations for economic reforms. Hopes for easing the debt brake are fading, which could limit fiscal measures to support growth. After contracting by 0.3% in 2023, Germany's economy shrank by 0.2% in both the fourth quarter of 2024 and the full year. This highlights the fragile state of Europe’s largest economy and the urgent need for government action to drive growth.
Can Trump’s Tariffs Boost the US Dollar Again?
US President Donald Trump confirmed that tariffs on imports from Mexico and Canada will proceed as planned. This has raised concerns in the markets about the potential negative impact on global growth, while increased safe-haven demand has eased pressure on the dollar.
The US dollar started the week at its lowest level in two months but recovered quickly after Trump's announcement. The US Dollar Index (DXY) rebounded from 106.12, while EUR/USD remains below the 1.05 resistance level it recently tested. The outcome of Germany’s coalition talks and the economic effects of Trump’s tariffs are expected to continue influencing EUR/USD.
How Economic Data Shapes EUR/USD Movements
While the German election results brought short-term optimism to the markets, economic data continued to align with expectations. Business confidence in Germany improved slightly, with the IFO Index rising from 84.3 to 85.4. In the Eurozone, annual inflation for January was reported at 2.5%, matching forecasts.
In the US, investors are focused on the upcoming Personal Consumption Expenditures (PCE) Index release. The Fed’s preferred inflation gauge is expected to decline from 2.6% to 2.5% for the headline figure and from 2.8% to 2.6% for core inflation. Any deviation from these expectations could increase market volatility. If inflation comes in higher than expected, it may weaken expectations for Fed rate cuts, strengthening the dollar.
Markets will also be watching US consumer confidence and growth data. In particular, ISM manufacturing data is expected to provide insights into the pace of US economic growth. If growth concerns rise, pressure on the dollar could increase slightly.
EUR/USD Technical Outlook
The EUR/USD pair is showing signs of recovery from a technical perspective. Fibonacci levels, moving averages, and trend lines indicate that the price is approaching resistance near 1.05.
Support and Resistance Levels
Resistance: The 1.0508 level is a key resistance point. A breakout above this level could push the pair higher toward 1.0605 (Fib 0.382).
Support: The first short-term support is at 1.0467 (Fib 0.236). If this level breaks, the next support levels to watch are 1.0453 and 1.0426.
Moving Averages and Trend Outlook
8 EMA (Green) and 21 EMA (Yellow ): Short-term moving averages support the upside. The 8 EMA remains above the 21 EMA, signaling continued positive momentum.
89 EMA (Red): The 89 EMA acts as medium-term resistance. A breakout above this level could strengthen the uptrend.
Trend Lines: The short-term rising trend line remains intact. However, if the price fails to break above 1.0508, a downside correction may follow.
Oscillators and Momentum
Stochastic RSI: Currently in the overbought zone, indicating a possible short-term correction. However, the overall trend remains upward.
Conclusion and Expectations
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If the price holds above 1.0508, upward momentum could strengthen, pushing towards 1.0605.
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If 1.0467 and 1.0453 support levels break, the likelihood of a pullback towards 1.0426 and 1.0380 increases.
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With the Stochastic RSI in the overbought zone, a short-term correction remains a possibility.
In summary, selling pressure may increase if the pair fails to break 1.0508, but the bullish outlook remains intact as long as it holds above the trend line.
Although EUR/USD saw a chance to recover after the German election results aligned with expectations, uncertainty around coalition talks and Trump’s trade policies could weigh on the pair.
This week, US PCE inflation data and growth figures will be key in shaping the pair’s movement. Additionally, investors will closely watch developments in Germany’s government formation process. If coalition talks progress smoothly, the euro may rebound.
However, prolonged negotiations could boost safe-haven demand for the dollar, adding downward pressure on EUR/USD.
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