The EUR/USD pair has stabilised around the 1.0960 region after a dip to 1.0880, following a recent peak in the mid-1.1100s. The US Dollar faces headwinds as expectations grow that the US economy may enter recession, prompting potential rate cuts from the Federal Reserve.
Concerns about escalating trade tensions between the US and EU limit bullish sentiment toward the Euro. The 27-nation bloc is subjected to import tariffs of 25% on steel, aluminium, and cars, while the EU plans to respond to US tariffs with additional duties.
Economic Indicators
Upcoming economic indicators, such as German Industrial Production and Trade Balance data, will be closely monitored. Trade-related developments remain a critical factor in shaping market sentiment and influencing the currency pair’s dynamics.
We’ve seen EUR/USD settle near 1.0960, recovering from a short dip to 1.0880 after failing to sustain its earlier surge into the mid-1.1100s. The US Dollar’s losses have been tied to increasing speculation that the Federal Reserve may begin cutting rates if upcoming data supports a slowing economy. With talk of contraction in the US becoming louder, demand for the Dollar has weakened in anticipation of easier monetary policy.
Powell and his colleagues face mounting pressure to respond if leading indicators continue to hint at softer output. Swaps markets are pricing in higher odds of rate reductions within the next two quarters. In response to this, we’ve seen a recalibration in pricing across Eurodollar and other rate-sensitive derivative instruments. That repricing has tilted near-term positioning slightly in favour of Euro strength, though the support remains cautious.
At the same time, any bullish interest in the single currency has been held back. Tariff threats from across the Atlantic are acting as friction. In Washington, there’s been movement toward reinstating or extending duties on European exports like cars and metals. That pressure doesn’t help Euro buyers. Brussels has responded by escalating its own countermeasures, raising the potential for broad-based friction on both trade and production fronts.
German Data and Fed’s Influence
Upcoming figures out of Germany—specifically industrial production and the trade balance—will give us key insight into how Europe’s export-heavy economy is faring amid these external pressures. If the numbers miss expectations, that has the potential to dent confidence and compress yield differentials back in the Dollar’s favour.
For now, short-term implied volatilities remain subdued but are showing signs of picking up ahead of this data. Market participants should be considering adjustments to implied skew, particularly around out-of-the-money downside strikes. Any print that surprises weak could renew Dollar demand, eating into recent Euro gains and reviving the downward path we saw earlier this month.
That said, should German data exceed forecasts, alongside any dovish Fed communication, resistance levels nearer 1.1000 may become vulnerable once more. It would be prudent to consider calendar spreads or convexity-steepening strategies to remain flexible. Watching the rate curve’s reaction to both regions’ economic outcomes will offer additional colour.
In the immediate term, we are looking for how the interplay between data and policy expectations feeds into term structure across EUR/USD vol, particularly for expiries that bracket central bank meetings. Pricing has not fully adjusted to these upcoming risk events, and that gap could create narrow windows for opportunistic curve plays.
