EUR/USD: Bullish Narrative Tested by U.S. Trade Threats

Author: Daniela Hathorn

Date: 15 July 2025

Overview

The EUR/USD currency pair has experienced a robust upward trend throughout 2025, but recent developments have introduced uncertainty into this previously well-supported narrative. The gains earlier in the year were largely attributed to a weakening U.S. dollar, but the situation has become more complex as July approaches.

Dollar Weakness vs. Euro Strength

Initially, the euro's performance against the dollar appeared strong, primarily due to the dollar's decline. The U.S. dollar index has been on a downward trajectory for most of the year, creating a favorable environment for the EUR/USD pair. However, the euro's strength is also evident against other major currencies, such as the yen and sterling, indicating intrinsic strength.

This intrinsic strength is partly due to the European Central Bank's (ECB) proactive policy measures. The ECB was among the first major central banks to cut rates following the COVID-19 pandemic, reducing rates by approximately 200 basis points over the past year. In contrast, the Federal Reserve and the Bank of England have taken a more cautious "wait-and-see" approach, which has bolstered market confidence in the euro.

A Shift in Sentiment

Recently, the momentum has shifted as the U.S. dollar has regained strength, supported by resilient economic data and expectations of tighter fiscal conditions. This shift coincides with escalating trade tensions between the U.S. and the EU, particularly concerning proposed 30% tariffs on European goods. Such tariffs have raised concerns about growth in the EU, especially for export-driven economies like Germany. German and French policymakers have warned that these tariffs could harm transatlantic relations and the European economy.

These developments have put pressure on the EUR/USD pair, halting its rally and raising questions about whether this is a healthy pullback or the beginning of a broader trend reversal.

Technical Analysis

Despite the macroeconomic fundamentals still supporting the euro—resilient growth and inflation near the ECB's 2% target—the looming threat of U.S. tariffs has overshadowed the optimistic outlook. Technically, the euro remains in a structural uptrend, characterized by higher highs and higher lows since the start of the year.

However, the pair is nearing a critical inflection point. The last significant high was just above 1.18, while a prior support level around 1.16 could become pivotal. A break below this level, especially if it breaches the rising trendline connecting the year's higher lows, may indicate a faltering bullish trend.

Recent price action suggests strong interest from both buyers and sellers, with daily closes often finding support near their opening levels. This indicates that traders are cautious but not panicking, suggesting a pullback rather than a panic sell-off.

What to Watch Next

Market focus will remain on two key areas:

• Trade Policy Rhetoric: The evolution of trade discussions between the U.S. and EU will be crucial. If the 30% tariff threat materializes, it could lead to a sharper sell-off in EUR/USD. Conversely, signs of diplomatic progress could bolster the euro and reinforce bullish sentiment.
• U.S. Economic Data: Inflation data and labor market trends in the U.S. will influence Federal Reserve expectations. Strong data may temper rate cut expectations, boosting the dollar, while any softness could renew downward pressure on the greenback, allowing the euro to recover.

Currently, the EUR/USD trend remains technically intact, with recent movements resembling a healthy pullback rather than a breakdown. As key support levels are approached and further clarity on trade policy and economic data is awaited, traders should remain vigilant. The coming days will reveal whether this is merely a pause or a turning point in the trend.