The US dollar fell sharply this week against the euro, pushing EUR/USD to its highest level in months, as softer US economic data and rising expectations for Federal Reserve rate cuts weighed on the greenback. As of Friday’s close, the pair traded near 1.0900, up roughly 1.5% from the previous week’s open, marking its strongest weekly performance since late 2024.
Why the Dollar Is Weakening
The dollar’s decline was driven by a combination of factors. US retail sales for April came in below expectations, and the latest jobless claims rose more than forecast, signaling a cooling labor market. Meanwhile, inflation data earlier in the month showed a slight easing, reinforcing market bets that the Fed could begin cutting rates as soon as September. According to CME FedWatch, futures now price in a 65% probability of a rate cut at the September meeting, up from 45% a month ago.
In contrast, the European Central Bank has signaled a more hawkish stance, with policymakers emphasizing that inflation in the euro area remains sticky. This policy divergence has narrowed the yield gap between US and German bonds, making the euro more attractive to investors.
Technical Outlook for EUR/USD
From a technical perspective, EUR/USD has broken above key resistance at 1.0850, a level that had capped rallies since March. The pair is now testing the 1.0900–1.0920 zone, which coincides with the 200-day moving average. A sustained break above this area could open the door to 1.1000, a psychologically significant level. On the downside, support is seen at 1.0800 and then at 1.0750, which were previous resistance levels now acting as support.
Momentum indicators are turning bullish. The 14-day relative strength index (RSI) is hovering near 62, indicating bullish momentum but not yet overbought. The MACD has crossed above its signal line, confirming upward momentum. However, traders should watch for a potential pullback if the pair fails to hold above 1.0900 in the coming sessions.
Market Drivers to Watch Next Week
Next week, the focus will be on US PMI data, durable goods orders, and the Fed’s preferred inflation gauge, the core PCE price index, due on Friday. A hotter-than-expected PCE reading could revive dollar strength, while a soft print would likely cement rate-cut expectations. On the euro side, the German Ifo business climate index and the ECB’s consumer expectations survey will provide clues on the region’s economic health.
Geopolitical risks, including trade tensions and the ongoing conflict in Eastern Europe, could also influence safe-haven flows. Any escalation could temporarily boost the dollar despite its recent weakness.
Why This Matters for Forex Traders
The current shift in the dollar’s trajectory has broad implications for currency markets, commodities, and global trade. A weaker dollar makes US exports more competitive but can increase inflationary pressures by raising import costs. For eurozone exporters, a stronger euro could hurt competitiveness, potentially weighing on the region’s economic recovery. Traders and investors should monitor the upcoming data releases closely, as they will likely dictate the pair’s direction in the near term.
Conclusion
In summary, EUR/USD is at a critical juncture. The dollar’s slide is supported by fundamental and technical signals, but the pair faces stiff resistance near 1.0900–1.0920. The upcoming US inflation data and Fed commentary will be pivotal in determining whether the euro can extend its gains or if the dollar stages a rebound. As always, traders should manage risk and stay informed of evolving economic conditions.
FAQs
Q1: What is driving the US dollar’s weakness?
Soft US economic data, including weaker retail sales and rising jobless claims, along with growing expectations of Federal Reserve rate cuts, have pressured the dollar. The narrowing yield gap with European bonds has also reduced its appeal.
Q2: What are the key resistance and support levels for EUR/USD?
Immediate resistance is at 1.0900–1.0920, with a potential target of 1.1000. On the downside, support lies at 1.0800 and then 1.0750.
Q3: How could the upcoming PCE inflation report affect EUR/USD?
The core PCE price index is the Fed’s preferred inflation gauge. A hotter-than-expected reading could strengthen the dollar and push EUR/USD lower, while a soft print would likely boost the euro and support further gains.
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