Euro Is Not Rushing to Weaken

The U.S. Dollar Index (DXY) is declining by 0.5% to 99.50 points, while the EURUSD pair is rising by 0.5% to 1.13500. However, the pair has yet to confirm a breakout towards the primary downside targets at 1.11000–1.11500. A decisive drop below the support zone at 1.13100–1.13300 is needed to reinforce a bearish outlook.

Last week, the EURUSD dipped to 1.12650 but failed to extend the decline. The recent rebound appears puzzling, especially given the macroeconomic backdrop, which seems to favour the U.S. Dollar. In the first quarter of 2025, U.S. GDP contracted by 0.3% quarter-on-quarter, while the March PCE Price Index came in at 2.3% year-on-year, slightly above the consensus of 2.2%. Moreover, April's Nonfarm Payrolls showed strength at 177,000 versus expectations of 138,000, and unemployment remained flat at 4.2%. These figures suggest a potential rebound in Q2, with the Atlanta Fed’s GDPNow model forecasting growth in the range of 1.1–2.4% QoQ.

This cautious optimism also extends to international trade. Tensions between the U.S. and China are easing, with China extending an invitation to resume trade negotiations. President Donald Trump has remarked that China is keen to reach a deal.

Given this context, the EURUSD’s failure to break lower towards 1.11000–1.11500 is somewhat perplexing. Large investors continue to bet on a weaker Dollar. The WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) recorded net outflows of $14.4 million, signalling a further increase in bearish positions against the Greenback. Adding long positions around 1.13000 is questionable, especially considering these investors already entered positions at 1.09000. That said, some of their recent seemingly odd bets have turned out to be highly profitable—suggesting they may be acting on inside insight or anticipatory positioning ahead of the upcoming Federal Reserve meeting on Wednesday.

Although no interest rate cuts are expected this week, Fed Chair Jerome Powell may adopt a dovish tone under political pressure from President Trump. The current macroeconomic environment provides enough leeway for policymakers to remain moderately hawkish, but they may also signal a step towards rate reductions.

From a technical perspective, the EURUSD appears overstretched. Most upside targets have already been met, and overbought conditions are extreme. While short-term rebounds to 1.14000–1.14500 remain possible, a correction towards 1.11000–1.11500 is more plausible. Medium-term targets remain at 1.0600–1.0700, but a decisive catalyst will be required for the pair to make a meaningful move.