Euro Capped by Trade Tensions and ECB Restraint

Key Takeaways:

*Trade war risks remain elevated, with August 1 marking a critical inflection point.

*Sticky inflation limits ECB flexibility, capping potential rate cut bets.

*EUR/USD caught in a narrow range, awaiting U.S. data and trade clarity.

Market Summary:

The Euro traded in a tight range this week, weighed down by persistent trade tensions with the United States and ongoing uncertainty around the European Central Bank’s (ECB) policy path. While recent data showed the Eurozone’s trade surplus narrowed slightly to €16.2 billion in May, resilient export growth (+0.9% YoY) helped limit downside pressure on the single currency.

Geopolitical developments remain central to EUR sentiment. The EU’s threat to invoke its Anti-Coercion Instrument (ACI) in response to potential U.S. tariffs—especially on tech and pharmaceutical sectors—has raised fears of a transatlantic trade war. Investors are closely watching the August 1 deadline, when U.S. tariffs could formally take effect, potentially prompting a retaliatory response from Brussels. French-led efforts to escalate countermeasures underscore internal political fragmentation, which could complicate coordinated EU action.

Monetary policy divergence also continues to shape EUR dynamics. While the Fed has turned increasingly dovish amid soft inflation prints, ECB officials have adopted a more cautious tone. Sticky core inflation—holding at 3.7% in June—has tempered expectations of aggressive ECB easing, with markets now pricing in fewer than 50bps of cuts through 2025.

Meanwhile, broader macro risks—including sluggish Chinese demand, elevated energy costs, and shipping disruptions in the Red Sea—are further clouding the outlook for the export-driven Eurozone. Despite these challenges, a tentative Middle East ceasefire and improving global risk appetite have steered flows into risk-sensitive assets, offering modest near-term support to the euro.

Looking ahead, the EUR’s trajectory will depend heavily on the outcome of US-EU trade negotiations and incoming U.S. inflation data, particularly core PCE. A breakthrough in trade diplomacy or a dovish surprise from the Fed could catalyze a sustained move above the 1.17 handle, while a breakdown in talks could send EUR/USD back toward the 1.16 support zone.

EURUSD, H4: 

EUR/USD remains vulnerable after a failed attempt to reclaim the key 1.1690 resistance zone, with recent price action stalling just below the 50-period moving average. The pair briefly dipped below the 1.1594 support before recovering, but upside momentum appears weak as sellers continue to defend the 1.1690 resistance band. This reflects a cautious market tone and raises the possibility that the bounce may have been corrective rather than a trend reversal.

Momentum indicators support this view. The Relative Strength Index (RSI) sits at 40, which is still in bearish territory and struggling to break back above the midpoint of 50. Despite a minor uptick, the RSI continues to signal limited buying strength and lingering downside risk. The MACD, while showing a slight bullish crossover, remains shallow and below the zero line, indicating that bullish momentum is yet to gain meaningful traction.

Unless EUR/USD can close decisively above 1.1690 and break the grip of its downward-sloping moving averages, the risk of renewed selling remains elevated. Immediate support is seen at 1.1590, with a deeper decline potentially targeting the 1.1470 levels. 

Resistance levels:  1.1690, 1.1840

Support levels: 1.1590, 1.1470