The EUR/USD pair continues to trade within a narrow price range, showing mixed dynamics. Traders remain cautious due to an almost empty economic calendar. The most important macroeconomic reports will be released in the second half of the week. We will see the second estimate of U.S. GDP growth for Q4 on Thursday, and on Friday, the core PCE index will be published. The U.S. Consumer Confidence Index was released on Tuesday, which we will discuss.
Currently, Donald Trump and Germany are in the spotlight. While the U.S. president prepares to impose tariffs on all imports from Canada and Mexico, Germany is working on forming a ruling coalition following the recent Bundestag elections. Although nothing sensational has emerged, traders remain attentive to the evolving news cycle, as these events could impact the markets later.
In Germany, election results were predictable. The winner of the early Bundestag elections, Christian Democratic Union (CDU) leader Friedrich Merz, ruled out collaboration with the far-right "Alternative for Germany" (AfD) party. Instead, a coalition with the Social Democrats (SPD) will be formed. Despite AfD securing second place and doubling its 2021 election result (becoming the dominant force in former East Germany), it will remain in opposition. Situational alliances with the Left Party can enable the far right to obstruct certain issues, such as amendments to the Constitution; however, the CDU/CSU and SPD will ultimately dominate decision-making. While AfD's rise is a concerning signal, the CDU/CSU and SPD coalition is an acceptable outcome for the euro.
The key market driver remains Donald Trump. On Monday, he shocked markets by confirming that tariffs on Canada and Mexico will be imposed on time. These 25% tariffs on all Canadian and Mexican goods were announced in early February after Trump's negotiations with Canadian Prime Minister Trudeau and Mexican President Claudia Sheinbaum. Following those talks, Trump delayed the tariffs until March 4 in exchange for commitments from Canada and Mexico. Canada has agreed to classify drug cartels as terrorist organizations and will appoint an official to combat them. The Mexican President has also decided to postpone the introduction of tariffs. Sheinbaum has committed to deploying 10,000 soldiers to the U.S. border to help prevent drug trafficking.
However, despite these measures, the Trump administration remains unconvinced and has not canceled the tariffs, which total nearly $920 billion. While Trump did not specify a new deadline, he hinted that the current efforts from Canada and Mexico are insufficient. As a result, even if another March extension is granted, it won't generate the same optimism as the February delay did.
Meanwhile, reports surfaced on Tuesday that the Trump administration is pressuring key allies to impose stricter restrictions on China's chip manufacturing industry. According to Bloomberg, White House officials recently discussed banning engineers from ASML Holding NV and Tokyo Electron Ltd from servicing chip production equipment in China. Trump also plans to tighten restrictions on China's semiconductor industry soon.
Due to risk aversion, the U.S. dollar remains stable, though conflicting macroeconomic data prevents dollar bulls from dominating the EUR/USD pair. The U.S. Conference Board Consumer Confidence Index fell into negative territory, dropping to 98.3—its lowest reading since June 2024—while analysts had expected a smaller decline to 102.7. This marks the fourth consecutive monthly decline. The February result is the weakest since June 2024.
Conversely, the Richmond Fed Manufacturing Index came out positive, rising to 6 points, its first move out of negative territory since October 2023. However, as a secondary macroeconomic indicator, it provided little support for dollar bulls.
The outlook for EUR/USD remains uncertain. Neither bullish rallies nor bearish pullbacks are convincing at this time. The fundamental backdrop is mixed: on one hand, a risk-off sentiment is supporting the dollar, while on the other hand, weak U.S. macroeconomic reports, including disappointing retail sales from January, are limiting its strength.
Therefore, at the moment, it is advisable to take a wait-and-see position for the pair. For a bullish breakout to occur, EUR/USD buyers need to consolidate above the resistance level of 1.0550, which is the upper boundary of the Kumo cloud on the daily (D1) timeframe. If this happens, the Ichimoku indicator will generate a bullish "Parade of Lines" signal.
Conversely, bearish momentum will only become relevant if the pair falls below 1.0440, which is the lower line of the Bollinger Bands and corresponds with the upper boundary of the Kumo cloud on the 4-hour (H4) timeframe.
