EUR/USD Rebounds from 27-Month Low but Tariff and Yield Risks Loom
EUR/USD recovered from a 27-month low on Monday, surging from 1.0125 to 1.0335 after the U.S. announced a one-month delay on tariffs for Mexico. The pair had initially dropped in Asia following President Trump’s tariff announcement but gained traction in New York as USD selling intensified. A dip in USD/CNH below 7.3250, alongside a recovery in stocks and gold reaching record highs, provided additional support for the euro. Despite the rally, EUR/USD closed near 1.0280, down 0.78% on the session, as broader concerns over economic divergence and tariff risks remain.
Technical indicators continue to highlight downside risks. While both daily and monthly bull hammers suggest potential stabilization, falling RSI levels on multiple timeframes reinforce the prevailing bearish trend. EUR/USD remains below a series of falling daily moving averages, and the recent break of the downtrend line from the September 30 high appears to have been a false breakout. Immediate resistance lies at 1.0335, while key support is seen at 1.0125. A deeper decline toward parity remains possible, especially as German-U.S. spreads widen further and terminal rate spreads for the Fed and ECB hit -204bps.
The fundamental outlook remains tilted toward the dollar. Eurozone PMI data showed signs of stabilization but remains in contraction, while U.S. January PMI signaled manufacturing growth, with rising prices and employment components reinforcing Fed hawkishness. With Trump suggesting that Europe could be next in line for tariffs, markets may increasingly see the eurozone’s export-heavy economy as vulnerable. Further deterioration in spreads and risk sentiment could drive EUR/USD lower, with parity becoming a stronger possibility if economic divergence continues to favor the U.S.