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27.05.2025 12:23 AM
Complete Uncertainty: EUR/USD Outlook

In the eurozone, political issues have once again become a top priority. On May 24, U.S. President Trump announced plans to impose a 50% tariff on all goods from the EU starting June 1, 2025, stating that "talks with the EU are leading nowhere." However, the markets hardly reacted this time, as they have become accustomed to Trump's sudden decisions often being just as quickly reversed. Indeed, within two days, Trump again reversed his intention to implement the increased tariffs, returning the situation to its previous state.

According to Trump himself, the EU requested more time to "reach a favorable deal." It is unclear whether the two sides will manage to come to an agreement by July 9, but in any case, it seems unlikely that the final tariff level for the EU will end up at 50%. That understanding was enough to calm the markets.

Eurozone PMI indices look weak. The composite index fell to 49.5, entering contraction territory, primarily due to a decline in the services index, which dropped to 48.9. Considering that services account for 73% of the eurozone economy, this trend may signal a slowdown in real GDP growth — meaning that instead of a modest gain of 0.2% in the previous quarter, we could see zero or even negative growth in Q1.

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A similar situation is unfolding in France and Germany, where service PMIs slowed to 47.7 and 47.2 respectively. Only relatively strong manufacturing kept the composite index at an acceptable level. In contrast, the U.S. showed stable growth in manufacturing and services activity.

European Central Bank officials are describing the current environment in bleak terms. Nagel captured this sentiment clearly by stating that uncertainty will likely become the new normal. Additionally, he noted that the current interest rate level is not restrictive, which may suggest a willingness to slow down the pace of rate cuts. Satunas sees a rate cut in June, followed by a pause. Market forecasts for the ECB imply that a June rate cut is inevitable, while expectations for the Fed have shifted toward autumn. For EUR/USD, this setup signals an increased likelihood of a downward reversal.

According to the latest CFTC report, speculative positioning on the euro deteriorated slightly over the reporting week; however, the accumulated bullish bias remains significant. The estimated price has settled below the long-term average, suggesting the bullish impulse is over, and a southward reversal is underway.

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Last week, we forecasted that EUR/USD was finishing its upward movement and entering a sideways range with a downward bias. This forecast did not materialize — the euro still looks confident — but we continue to believe that the period of dollar weakness is nearing its end, and the local high of 1.1574 will not be breached. The current rise can be used to enter short positions, as we expect the euro to remain below 1.1425, making short entries with a stop just above that level quite justified. The target is the lower boundary of the range at 1.1065. As for the further trajectory, given the high level of uncertainty, it is too early to make definitive predictions.

Kuvat Raharjo,
Analytical expert of InstaForex
© 2007-2025
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