The EUR/USD pair is currently stabilizing following a significant surge that brought it to its peak level since June 2021, approaching 1.2000 last week. The recent pullback encountered support within the 1.1780–1.1775 range, attracting dip-buyers, and the spot is currently fluctuating between 1.1815 and 1.1830 during the early sessions of European and Asian trading. The current range has established itself as the immediate balance point: situated beneath the recent high of 1.2000 while remaining securely above the latest swing low near 1.1780. Price action remains constrained as market participants anticipate two significant catalysts occurring simultaneously – the Eurozone flash HICP expected at a consensus of 1.7%, down from the previous 1.9%, alongside US data releases (ADP employment and ISM Services) that could rapidly influence the dollar component of EUR/USD. The macroeconomic environment presents a balancing act that maintains support for EUR/USD while also imposing limitations. In the Eurozone, January’s preliminary HICP is anticipated to decelerate to 1.7% year-over-year from 1.9%, while core inflation is forecasted to remain steady at 2.3% year-over-year. The interplay of headline easing alongside core inflation remaining above 2% aligns with the European Central Bank’s perspective of a transient decline, lacking the rationale for an urgent and forceful response.
The ECB is indicating a measured approach ahead of Thursday’s meeting, and market participants perceive this as a central bank that will act with greater deliberation and timing compared to the Fed. The trajectory of rates in the US appears to be more accommodating. The market continues to reflect expectations for approximately two more Federal Reserve rate cuts in 2026, even in light of Donald Trump’s nomination of Kevin Warsh, who is viewed as relatively hawkish, for the position of Fed chair. The statements from the Fed indicate a tendency towards a more accommodative stance: Stephen Miran has proposed that policy should be reduced by approximately 100 basis points this year, despite inflation not being an immediate concern. Meanwhile, Thomas Barkin acknowledges that inflation exceeds the 2% target but continues to emphasize the need for further progress instead of new tightening measures. The interplay of these factors maintains a more accommodative policy stance in the US compared to the euro area, providing a supportive backdrop for EUR/USD in the medium term, despite short-term fluctuations driven by safe-haven demand for the USD. The overall dollar environment is characterized by a DXY that did not manage to prolong its recent recovery. The index, having rebounded from approximately 95.55, is currently positioned around 97.30, reflecting a slight decline following two consecutive days of increases. The technical framework appears robust: a descending trendline originating from the January peaks converges with the 200-EMA in the 97.60–97.70 range, serving as a significant barrier to upward movement. Below the current price, the 50% Fibonacci retracement at 97.22 and the 38.2% level near 96.83 serve as significant support levels. While DXY remains below 97.80 and faces challenges in surpassing the EMA/trendline cluster, the potential for the dollar to appreciate appears constrained, reinforcing a positive outlook for EUR/USD above 1.18. A decisive move above 97.80 on DXY would swiftly alter the dynamics, paving the way to 98.25 and exerting significant pressure on the pair; however, the present price action – characterized by short-bodied candles and a lack of decisive follow-through – suggests a constrained dollar rather than the onset of a new upward trend.
From a technical perspective, EUR/USD continues to exhibit a constructive trend, even in light of the recent pullback from 1.2000. From a higher-timeframe perspective, the spot remains positioned above the 200-day SMA and the 200-EMA, which are closely aligned around 1.1780, establishing this level as a critical structural support. Since mid-January, the pair has adhered to a rising trendline originating in the 1.16s, currently positioned just beneath the 1.1780–1.1800 range; each approach to that area attracts buying interest. On the 2-hour chart, the 50-EMA is positioned around 1.1860–1.1870, serving as immediate resistance. The EUR/USD remains confined within the range of approximately 1.1780, supported by the trendline and the 200-EMA, and 1.1860–1.1900, which is characterized by the short-term moving average and horizontal supply, as market participants assess the recent rally from below 1.17. Momentum indicators suggest a pause rather than a reversal. The RSI has retraced to the 50–55 range following previous overbought levels around 1.20, indicating that the prior overextension has been alleviated without a complete trend reversal. Provided the pair maintains a position above 1.1780 on daily closes, the movement appears to be a standard correction within an uptrend, with 1.1900 and subsequently the 1.2000 level serving as key upside reference points. A continued decline below 1.1780 would undermine that framework and shift focus to 1.1700 as the subsequent target on the downside. The forthcoming movement for EUR/USD is contingent upon a substantial release of economic data. At 10:00 CET, the market will receive the Eurozone flash HICP, with the headline anticipated at 1.7% and the core at 2.3%.
An increase exceeding 1.7% in the headline figure or any positive deviation in the core metrics would shift expectations away from imminent ECB easing, likely bolstering the euro, particularly with the ECB meeting approaching tomorrow. A softer-than-expected 1.7% or a decline in the core gauge would prompt the market to consider earlier cuts and might drive the pair back into the 1.1780–1.1800 support band. As the US session progresses, attention turns to the ADP National Employment Report and ISM Services PMI. The recent government shutdown has postponed the official jobs report, making the ADP release at 8:15 ET particularly significant as an indicator of labor demand. A robust ADP report alongside a solid ISM Services reading could provide a temporary boost to the dollar, potentially challenging EUR/USD support, especially in the context of fragile risk sentiment. On the other hand, disappointing employment figures or a lackluster services report would support the narrative of a Federal Reserve likely to implement several rate cuts, potentially driving the pair higher towards 1.1900 and further.
The current positioning in EUR/USD is influenced by the phenomenon referred to as the “Warsh trade.” The nomination of Kevin Warsh, perceived as more traditional and less accepting of prolonged balance-sheet growth, initially supported the dollar and prompted some profit-taking in the pair. The initial reaction has diminished as markets have shifted their attention back to the core message from Federal Reserve officials: the baseline continues to suggest further easing in 2026, rather than a move towards tightening. The ECB is indicating that the recent decline in headline inflation to approximately 1.7% YoY is a short-term fluctuation; with core inflation steady at 2.3%, Frankfurt has justification to postpone any rate cuts. The divergence between a Fed anticipating two additional cuts and an ECB that can rationalize a slower approach is precisely the macroeconomic environment that has historically bolstered EUR/USD over a multi-month period, despite the potential for significant short-term fluctuations around the 1.18–1.20 range. The primary risk to that narrative lies in a data sequence that compels the ECB to adopt a more dovish stance swiftly, such as a series of HICP prints below 1.7% or evident declines in euro-area growth indicators.