The US Dollar’s late-January collapse has been largely reversed. The DXY is currently back testing the 97.9–98.0 range, with a focus on the 97.94 Fibonacci level that has influenced price movements since April of the previous year. The level served as a floor following the early-2025 USD selloff, subsequently oscillating between resistance and support through December. In the initial weeks of 2026, it did not break decisively on the downside. As the oversold conditions in the Dollar corrected, EUR/USD retraced from its rise above 1.20 and declined towards a one-month low. The pair currently trades beneath the 1.18 handle, with upward movement restricted and demand compelled to protect the mid-1.17s instead of striving for new highs. On the daily chart, EUR/USD has adhered to a narrow yet significant structure. The 1.1909–1.1919 band has firmly dismissed efforts to prolong the January spike, establishing the first significant ceiling. Sellers utilized that zone to re-enter, propelling the pair downward. The initial significant demand zone is located at 1.1748, a long-term Fibonacci level that has drawn in dip-buyers and resulted in brief upward movements; however, these recoveries have faltered in the vicinity of 1.1800–1.1805. If the market falls below 1.1748 and fails to maintain 1.1717, the subsequent structural level is approximately 1.1686. A daily close beneath that threshold indicates that the complete reversal of the post-January USD washout is underway, paving the way towards the low-1.16s and possibly down to 1.15. A sustained move through 1.1919 and then 1.2000 is necessary before one can contend that the EUR is reclaiming the initiative. Until that occurs, EUR/USD continues to exhibit a downside-biased range within 1.17–1.19.
The recent US macroeconomic data presents a scenario that constrains the Federal Reserve while simultaneously bolstering the Dollar in its competition with the euro. Fourth-quarter GDP decelerated from approximately 4.4% to about 1.4% annualized, affirming that growth is indeed cooling. Simultaneously, core PCE—the Federal Reserve’s favored measure of inflation—remains just above 3% year-on-year, reflecting a monthly increase of 0.4%. The current situation does not provide a context in which the Fed can significantly reduce rates. Ten-year Treasury yields remain steady at approximately 4.08%. The dollar index remains stable, hovering around 97.7–97.9, without retreating to the previous lows. The message regarding EUR/USD is unequivocal. The United States continues to present a superior nominal and real rate profile. The eurozone fails to present a convincing growth or yield benefit that would warrant a prolonged premium. Provided that the market anticipates only two 25 basis point cuts for 2026 and US yields remain close to 4%, the carry and rate differential persist in favoring the Dollar side of the cross. The Supreme Court’s ruling that dismantled the previous emergency-based global tariff framework eliminated a crucial legal foundation of the last US administration’s trade approach; however, it did not extinguish the protectionist sentiment. The White House swiftly shifted to a new framework: a 10% global tariff under Section 122, added on top of existing Section 232 and 301 measures. Treasury estimates indicate that the tariff revenue for 2026 will be “little changed” if the one-for-one structure is implemented, suggesting that global trade friction is not vanishing but merely being repackaged. Federal officials have indicated that, should the scheme prove to be effectively neutral for overall revenue, the primary macroeconomic impact may be minimal; however, uncertainty regarding corporate costs and planning remains elevated. This configuration for EUR/USD is not favorable. The euro area exhibits a greater reliance on trade and is more vulnerable to the fluctuations of global manufacturing and export cycles compared to the US. A robust tariff regime tends to impact Europe more significantly, particularly when US domestic demand and fiscal policy continue to be more favorable. The legal framework governing tariffs has evolved; however, the inherent inclination towards protectionism remains unchanged, continuing to exert pressure against the euro.
Escalating tension in the Middle East and the risk of US strikes on Iranian targets have introduced an additional layer of risk premium. Classic “risk-off” flows are evident: gold has surged back above $5,000 per ounce and is testing the $5,100 level after a drop to approximately $4,860; US Treasuries are drawing demand on dips; the Dollar remains strong even during intraday pullbacks. In this environment, EUR/USD typically behaves as a pro-cyclical asset. The euro is linked to global trade, bank balance sheets, and cyclical sectors, whereas the Dollar and gold serve as key hedges. The pattern is once again in evidence. Geopolitical headlines impact equity sentiment negatively, gold sees increased demand, the DXY strengthens, and EUR/USD is driven toward the lower boundary of its range. Unless tensions decline significantly or the eurozone delivers an unexpected positive growth outcome, the risk premium structure remains biased towards a long USD position against the EUR. The yen continues to be the concealed force influencing a considerable segment of the DXY movement. Over a five-year horizon, the JPY remains significantly devalued in comparison to the USD, EUR, and GBP. In late January, the carry trade in JPY faced significant challenges, leading to a collapse in USD/JPY that subsequently pulled the DXY downwards. EUR/USD surged past 1.20, reaching overbought levels on the daily chart, despite the absence of euro-specific fundamentals to support such a rally. The squeeze has been unwound. USD/JPY has regained territory approaching 155.00 following a turbulent response to Japanese political developments and robust US economic data. As long as Japanese rates remain near zero and the authorities accept a weak yen, the structural carry trade continues, and the DXY maintains its support. This limits EUR/USD rallies, even as eurozone data shows slight improvements. If intervention or a genuine BoJ policy shift drives USD/JPY down toward 150.00 or lower, the resulting shock will likely manifest as an upward movement in EUR/USD. Right now, that is not the base case.
The past year has clearly demonstrated one thing: EUR/USD frequently follows the movements of the Dollar instead of leading them. July 2024 served as a quintessential illustration. A BoJ-linked event caused a significant drop in USD/JPY, leading to a decline in DXY, while EUR/USD surged towards 1.1212 despite disappointing eurozone data. The recent episode reflects a striking similarity. The Dollar reached its most oversold level in over five years on the daily chart in late January, while EUR/USD surged above 1.20. Now, the correction of that extreme positioning is driving the pair back toward its fundamental range. FXStreet’s weekly analysis indicates that EUR/USD is trading close to a one-month low, reflecting a more pronounced bearish sentiment as US data complicates the Federal Reserve’s easing trajectory and geopolitical risks escalate. The market continues to reflect expectations of approximately two Federal Reserve cuts this year; however, the likelihood of an early-cycle cut has diminished following the most recent GDP and PCE data releases. Simultaneously, the ECB contends with a less robust growth environment and is unable to convincingly adopt a more aggressive stance than the Fed. Speculative accounts have minimal justification to establish aggressive euro longs as long as this asymmetry continues. Price has now established a distinct tactical framework for EUR/USD. On the upside, 1.1800–1.1810 represents the first intraday friction area, succeeded by the more significant 1.1909–1.1919 band, and then the psychological 1.2000 handle.
On the downside, 1.1748 is the first support that matters; a break there puts 1.1717 in play, and a failure to hold that region opens 1.1686, the deeper structural floor from the prior cycle. As long as EUR/USD remains under 1.1919 and fails to achieve a convincing daily close above 1.2000, each bounce appears to be a corrective squeeze within a broader Dollar-supportive framework. A weekly close above 1.2000 would indicate the first genuine sign that the oversold Dollar conditions are not entirely resolved and that the shocks from tariffs and geopolitics have been absorbed. A decisive move below 1.1686, supported by broader risk-off sentiment and robust USD data, would indicate the beginning of a new bearish phase rather than merely a return to normalcy. As US GDP decelerates to approximately 1.4% while core PCE remains above 3%, ten-year yields hover around 4.1%, and the DXY stabilizes near the 97.9 pivot, trade tensions have been reshaped rather than eliminated, with geopolitical risks heightened. The prevailing dynamics continue to support the Dollar in the EUR/USD pair. The euro fails to present a persuasive rate or growth edge, and the pair has already turned away from resistance near 1.19. The clean trade remains unchanged: EUR/USD is a Sell on rallies, not a Buy and not a neutral Hold at current levels. Short setups into the 1.1800–1.1919 zone, with a downside focus on 1.1748 first and then 1.1717–1.1686, align with both macro and technical conditions. A sustained break above 1.2000, along with a noticeable shift in the Fed-ECB rate narrative, is the only scenario that warrants an upgrade from the current bearish bias.