EUR/USD gains momentum ahead of the ECB policy meeting

EUR/USD holds firm around 1.0800 ahead of the ECB’s monetary policy decision, set for release at 13:15 GMT on Thursday.

The ECB is widely expected to lower its Deposit Facility Rate by 25 basis points (bps) for the fifth consecutive time, bringing it down to 2.5%. Additionally, the Main Refinancing Operations Rate is anticipated to drop by 25 bps to 2.65%. Investors will closely monitor the monetary policy statement and ECB President Christine Lagarde’s press conference for insights into future policy direction and inflation expectations.

Recently, traders have dialed back expectations of two ECB rate cuts by the summer. This shift follows Germany’s likely next chancellor, Frederich Merz, and the Social Democratic Party (SPD) agreeing to create a €500 billion infrastructure fund and ease borrowing limits. Market participants believe these reforms could drive inflation higher while boosting economic growth in Germany, the Eurozone’s largest economy.

On Thursday, Reuters reported that Germany’s lower house of parliament will begin discussions on March 13 regarding increased defense and infrastructure spending, alongside significant changes to state borrowing regulations. A final vote on the “debt brake” reforms is scheduled for March 18.

Investors will also focus on Lagarde’s remarks regarding potential U.S. tariffs. Concerns persist over how Trump’s proposed trade policies could impact the already fragile Eurozone economy, which is suffering from weak domestic and external demand.

Uncertainty looms over the extent of U.S. tariffs on Eurozone goods. Germany, a key automobile exporter to the U.S., currently faces a 2.5% tariff on car exports, while the Eurozone imposes a 10% duty on U.S. imports. Trump has previously threatened a 25% tariff on foreign automobiles, and investors are keen to see whether he opts for a 10% or 25% rate on German cars.

On the economic front, Eurozone Retail Sales unexpectedly declined by 0.3% month-over-month in January, following a flat reading in December. Analysts had projected a 0.1% increase. Year-over-year, retail sales rose by 1.5%, missing expectations of 1.9% and falling short of the previous 2.2% reading.

Daily Digest Market Movers: EUR/USD Holds Steady as Trump Tariff Fears Ease

EUR/USD strength is partly driven by weakness in the U.S. Dollar (USD). The U.S. Dollar Index (DXY) has extended its losing streak for the fourth consecutive day, slipping to 104.00, its lowest level in four months.
Market sentiment has shifted, with investors now believing that Trump’s trade war will be less disruptive than initially feared, reducing the U.S. Dollar’s risk premium.
On Wednesday, White House Press Secretary Karoline Leavitt confirmed that Trump has granted a one-month exemption on 25% tariffs imposed on automobiles from Canada and Mexico. He is also considering exemptions for certain agricultural products.
The temporary tariff relief has weakened the U.S. Dollar, compounded by disappointing U.S. private employment data. The ADP report showed that the U.S. private sector added only 77K jobs in February, well below expectations of 140K and the prior reading of 186K.
Soft labor market data has strengthened expectations of Federal Reserve (Fed) rate cuts. The CME FedWatch Tool now shows a 76% probability of a Fed rate cut in June, up from 70% a week ago.
Investors will closely watch the U.S. Nonfarm Payrolls (NFP) data for February, set to be released on Friday, for further labor market insights.

Technical Analysis: EUR/USD Aims to Stay Above 1.0800

EUR/USD surged past 1.0800 after a strong breakout above the December 6 high of 1.0630 on Wednesday. The long-term outlook remains bullish as the pair holds above the 200-day Exponential Moving Average (EMA), currently near 1.0640.

The 14-day Relative Strength Index (RSI) has jumped above 60.00, signaling strong bullish momentum.

Key levels to watch: