FOREX Fundamental analysis for EUR/USD on January 31, 2025
The fundamental factors of pressure on EUR/USD are still relevant. The difference in economic growth and monetary policy between the United States and the Eurozone creates pressure on the euro, but this is clearly not enough to push the pair to parity. However, a new wave of trade barriers could worsen the situation in favor of the dollar.
Donald Trump reiterated his intention to impose 25% duties on imports from Canada and Mexico starting from February 1. This statement strengthened the position of the US currency, and the euro came under pressure. The introduction of tariffs could strengthen the dollar due to rising inflation in the United States and lower economic activity in partner countries, including the European Union.
Monetary policy: Fed is waiting, the ECB is lowering rates
After the Federal Reserve decided to suspend the monetary policy easing cycle, the main pressure on EUR/USD will come from the European Central Bank (ECB). ECB President Christine Lagarde has repeatedly stressed the weakness of the Eurozone economy. Her opinion was supported by the Board of Governors, which decided to reduce the deposit rate from 3% to 2.5%.
These measures caused a drop in German bond yields and increased expectations of further policy easing. The futures market now predicts a 73bp rate cut by the end of the year, assuming three more acts of monetary expansion. At the same time, investors are currently planning only two cuts for the Fed, which creates favorable conditions for strengthening the dollar.
The euro holds its position, but risks persist
Despite pressure from the ECB's monetary policy, the euro managed to hold on thanks to Lagarde's statement that a 50bp rate cut was not discussed at the last Council meeting. In addition, according to Bloomberg, at the next meeting, the ECB may exclude from the accompanying statement the phrase that interest rates limit economic growth. If this does happen, further weakening of the euro may be less widespread than the market expects.
An additional risk for the Eurozone is possible US tariffs
The situation could worsen if the Trump administration expands tariff restrictions on the European Union. According to analysts at Berenberg Bank, the introduction of US duties against the EU could lead to a reduction in Eurozone GDP from 0% to -0.5%. This will be an additional incentive for the ECB to continue its easing policy, which will only increase pressure on the euro.
Uncertainty around duties: unanswered questions
There are still a number of unresolved issues regarding US tariffs.
• Will they apply to all sectors of the economy, or will they affect only certain segments?
• How long will the transition period be?
• Is the rate really going to be 25%, or can the American authorities ease the conditions?
One thing is clear – trade barriers are inevitable, and this factor will continue to push EUR/USD down.
Technical analysis: the strategy remains valid
The previously proposed forex trading strategy with sales of EUR/USD from 1.047 and strengthening of short positions from 1.0415 is fully justified. The 1.0415 level remains a key support. As long as the EUR/USD quotes are trading below it, the bearish trend persists.