Euro Gains on Dollar Weakness, Policy Divergence

Key Takeaways:
* Euro climbs as U.S. fiscal risks and tariffs hit dollar

* ECB-Fed divergence fuels EUR inflows despite export headwinds

* Trade tensions linger, but euro seen as regional safe haven

The euro continues to strengthen against the U.S. dollar in 2025, buoyed by a broad deterioration in greenback sentiment, renewed trade tensions, and shifting investor positioning. The EUR/USD pair has climbed nearly 13% year-to-date, driven largely by U.S.-centric risks—including mounting fiscal concerns and tariff-induced uncertainty under the Trump administration.

Risk appetite has also rotated back into the single currency, as market participants reduce exposure to the dollar amid deepening geopolitical fragmentation. President Trump’s imposition of 10% tariffs on EU imports, alongside threats of further hikes, has sparked retaliatory rhetoric from Brussels and fanned concerns over a breakdown in transatlantic trade ties. While the tariffs have weighed on European exporters—especially in autos and pharmaceuticals—the resulting shift in capital flows has paradoxically supported the euro, which is increasingly viewed as a regional safe-haven alternative.

Monetary policy divergence is adding another layer of complexity. European Central Bank (ECB) officials have expressed unease with the euro’s rapid appreciation, warning that sustained strength above $1.20 could warrant a recalibration of policy. While President Lagarde has welcomed the euro’s rising international role, market pricing now reflects the possibility of a 50bps ECB rate cut if the pair breaches the $1.25 threshold, especially if eurozone inflation continues to soften.

Meanwhile, the euro is also benefiting from broader skepticism toward the U.S. fiscal trajectory. The Trump administration’s proposed tax overhaul—branded the “One Big Beautiful Bill”—is expected to widen the federal deficit by nearly $4 trillion, amplifying concerns about debt sustainability. Moody’s recent downgrade of U.S. sovereign credit has accelerated flows away from the dollar and into alternative reserve currencies, including the euro and Swiss franc.

Looking ahead, the euro’s direction will likely hinge on three main factors: the outcome of ongoing EU-U.S. tariff negotiations, the trajectory of U.S. fiscal and inflation data, and the ECB’s response to sustained currency strength. While short-term risks persist—particularly if trade talks falter or the ECB intervenes—structural support for the euro remains intact amid shifting global reserve dynamics and U.S. policy uncertainty.

Technical Analysis

EURUSD, H4

EUR/USD has moderated after an impressive rally, now consolidating just below the 1.1840 psychological threshold. The pair’s advance from the 1.1490 breakout zone has been characterized by a series of higher highs and higher lows, signaling firm bullish control, likely supported by softening U.S. yields and improving Eurozone data surprises.

Technically, momentum has begun to flatten. The Relative Strength Index (RSI) sits at 52, drifting lower from previous elevated levels near 70. While not yet bearish, the RSI’s inability to sustain higher ground reflects fading upside strength and suggests bulls are taking a breather.

The MACD paints a similar picture: though the MACD line remains marginally above the signal line, the histogram has turned negative, hinting at emerging downside pressure. A confirmed bearish crossover would reinforce the potential for a deeper pullback toward initial support at 1.1690 or even 1.1610.

This positions EUR/USD at a key juncture—either a healthy pause before resuming its bullish structure, or the beginning of a broader corrective phase. A decisive break and close above 1.1840 would reassert bullish momentum, opening the door to challenge the 1.1910 zone, while sustained weakness below 1.1690 may shift the narrative back to range-bound consolidation.

Resistance Levels: 1.1840, 1.1910
Support Levels: 1.1690,1.1610