EUR/USD climbs as investors anticipate a limited trade war between the U.S. and China

EUR/USD continues its upward momentum, climbing above 1.0400 in Wednesday's European session. The pair gains strength as the US Dollar (USD) weakens for a third consecutive trading day.

The US Dollar Index (DXY), which measures the Greenback against six major currencies, declines toward 107.50, reflecting reduced risk premium as investors assume that a full-scale trade war is unlikely. Market participants expect trade tensions to remain largely confined to the United States (US) and China, following China's retaliatory tariffs on US exports, including farm equipment, select automobiles, and energy products such as coal and liquefied natural gas (LNG).

Beyond China, investors anticipate that US President Donald Trump will continue using tariffs as a strategic tool in trade negotiations. The postponement of 25% tariffs on Canada and Mexico suggests that tariffs are being leveraged more as a political maneuver rather than an economic necessity.

Looking ahead, the next key driver for the USD will be Friday's US Nonfarm Payrolls (NFP) report for January, which could shape expectations around the Federal Reserve's (Fed) monetary policy outlook.

For Wednesday's session, investors will closely watch the US ADP Employment Change and the ISM Services Purchasing Managers Index (PMI) for January, both of which could impact market sentiment.

Daily Market Movers: EUR/USD Rises as US Dollar Weakens

• EUR/USD gains ground despite the Euro (EUR) underperforming against its major peers, as the US Dollar (USD) declines. The Euro remains under pressure amid firm expectations that the European Central Bank (ECB) will continue easing monetary policy, with officials confident that inflation will sustainably return to the 2% target this year.
• In Wednesday's European session, ECB Vice President Luis de Guindos stated in an interview with Slovak newspaper Hospodárske Noviny that he sees inflation approaching the ECB's target but expects a temporary uptick in the coming months due to energy prices. When asked about the future of interest rate cuts, de Guindos said, "Even if our current trajectory under the current circumstances is clear, nobody knows the level at which interest rates will end up."
• Last week, the ECB cut its Deposit Facility rate by 25 basis points (bps) to 2.75%, maintaining that monetary policy remains restrictive. Traders anticipate at least three more rate cuts in the next three ECB policy meetings.
• Meanwhile, concerns over the Eurozone's economic outlook persist as market participants worry that the European Union (EU) could become the next target for US tariffs. Over the weekend, US President Donald Trump reiterated that tariffs on the EU are inevitable, stating, "They've really taken advantage of us."

Technical Analysis: EUR/USD Climbs Above 1.0400

EUR/USD has rebounded from Monday's three-week low of 1.0210, rallying past 1.0400. However, the pair remains below the 50-day Exponential Moving Average (EMA) at 1.0440, indicating that the broader trend is still bearish.

• The 14-day Relative Strength Index (RSI) is fluctuating between 40.00 and 60.00, signaling a sideways market trend.
• Support levels: The January 13 low of 1.0177 and the key psychological level of 1.0100 will serve as major support zones.
  Resistance levels: The 1.0500 psychological barrier remains the next key level for Euro bulls to overcome.

While EUR/USD is gaining upside momentum, the overall outlook remains cautious amid ECB rate cut expectations and trade uncertainty.