EUR/USD Price Forecast: Is 1.0500 the Launchpad for a Euro Rally or a Dead End?

EUR/USD Struggles at 1.0500: Breakout or Breakdown?

The EUR/USD exchange rate is at a pivotal moment, battling resistance at 1.0500 after bouncing from its recent low at 1.0360. Investors are weighing diverging economic signals from both sides of the Atlantic, with softening U.S. data pushing the dollar lower while European optimism strengthens the euro. Yet, major risks loom, including Federal Reserve rate expectations, ECB guidance, and the threat of U.S. tariffs on Europe. The market is shifting fast—will EUR/USD rally or face another reversal?

U.S. Economic Weakness Pressures the Dollar

Recent data from the U.S. suggests a slowing economy, challenging the long-standing narrative of American economic superiority. The Atlanta Fed’s GDPNowcast model now projects a -2.8% contraction for Q1, a sharp decline from prior estimates. Consumer confidence has dropped to 98.3, marking the largest fall in four years. Personal spending also slipped -0.2%, while initial jobless claims jumped to 242K, exceeding expectations. The manufacturing PMI has cooled to 50.3, signaling a loss of momentum.

At the same time, bond markets are flashing warning signs. The 10-year Treasury yield has dropped to 4.29%, down from 4.52% a month ago, while the 30-year yield fell to 4.56% from 4.76%. The shift reflects growing investor bets that the Fed will have to cut rates sooner than expected, weakening the dollar. If economic data continues to disappoint, the greenback could lose further ground, potentially allowing EUR/USD to break through 1.0500 and target 1.0600.

Euro Strength Supported by Surprising Growth & Military Spending

Unlike the U.S., European economic data is beating expectations. The eurozone’s economic surprise index is at its highest level in nearly a year, boosted by improving growth prospects in Germany and France. One major factor driving optimism is increased European military spending, particularly in response to the war in Ukraine. As Germany ramps up its defense budget and energy prices stabilize, the eurozone’s growth outlook is improving.

Additionally, inflation in the eurozone appears to be cooling, which could allow the ECB to maintain a cautious stance on rate cuts. With at least three ECB rate cuts already priced into markets, any signal that the central bank will delay easing could send the euro higher. Investors will be closely watching Thursday’s ECB interest rate decision and economic forecasts to gauge the bank’s next move.

U.S. Tariffs Pose a Major Risk to the Euro

While economic data and bond yields are driving EUR/USD for now, a major wildcard remains: U.S. tariffs on Europe. President Trump’s administration is weighing new tariffs on European imports, which could significantly impact the eurozone’s already fragile export-driven economy.

The severity of these tariffs will determine market reaction. If the U.S. imposes steep tariffs on key European goods, the euro could face a sharp selloff, sending EUR/USD back toward 1.0400 or lower. However, if tariffs are watered down or delayed, the euro could hold firm above 1.0500, giving bulls a chance to push toward 1.0600 and beyond.

Technical Levels: Can EUR/USD Hold Above 1.0500?

EUR/USD has rebounded from 1.0360 and is now challenging key resistance at 1.0500. The pair has formed a three-candle morning star pattern, typically a bullish signal. Momentum indicators like RSI (14) and MACD are trending higher, suggesting upside potential.

However, multiple tests of 1.0500-1.0530 have failed, making it a critical resistance zone. If EUR/USD breaks above 1.0530, the next target is 1.0600, followed by 1.0668, the June 2025 low. A break past 1.0726 (200-day moving average) would confirm a strong uptrend.

On the downside, failure to hold above 1.0500 could trigger a pullback toward 1.0450, with the 50-day moving average at 1.0400 acting as key support. A break below 1.0360 would invalidate the bullish outlook, opening the door for a retest of 1.0300.

Will EUR/USD Break Higher or Face Another Rejection?

With EUR/USD testing 1.0500, traders face a critical decision. The bull case relies on further signs of U.S. economic weakness, falling Treasury yields, and a more cautious ECB stance on rate cuts. If these factors align, EUR/USD could push higher toward 1.0600-1.0700.

The bear case depends on renewed dollar strength, either through a stronger-than-expected U.S. jobs report, Fed officials pushing back against rate cuts, or the U.S. imposing heavy tariffs on European goods. If any of these occur, EUR/USD could face a sharp reversal, dropping back below 1.0450 and potentially toward 1.0300.

Traders should closely watch Friday’s U.S. payrolls report and the ECB’s Thursday rate decision for confirmation of the next big move. A decisive break above 1.0530 or a failure below 1.0450 will set the tone for the weeks ahead.

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