EURUSD Rises as European Leaders Push for Ukrainian Peace Plan.

EURUSD currency pair has rebounded from a two-week low, gaining traction at the start of the week. This upward movement comes as European leaders, including Ukrainian President Volodymyr Zelenskyy, express a renewed commitment to drafting a structured peace plan for Ukraine. The plan, which discussed at a high-stakes summit in London, also involved UK Prime Minister Keir Starmer and leaders from France and other allied nations.

Market participants view this diplomatic effort as a positive development for the Euro (EUR), as a potential resolution to the Russia-Ukraine conflict could stabilize the Eurozone’s economy. The prolonged war has disrupted supply chains and contributed to inflationary pressures, so any sign of peace is likely to bolster investor confidence in the Euro.

This week, the European Central Bank (ECB) meeting on Thursday will be a focal point for traders. The ECB widely expected to cut its Deposit Facility Rate by 25 basis points (bps) to 2.5%, marking its fifth consecutive rate cut. The rate cut is largely anticipated due to concerns over the economic impact of US President Donald Trump’s proposed tariffs on Canada and Mexico, which could have ripple effects on global trade. Additionally, the ECB remains focused on ensuring inflation remains within its 2% target, despite mixed signals from recent economic data.

Factors Driving the EURUSD Rally

1. Optimism Around the Ukraine Peace Plan

One of the key drivers of the EUR/USD recovery is the optimism surrounding the peace talks involving Ukraine and key European nations. The war has had far-reaching economic consequences, including disruptions to energy supplies, food production, and overall trade in the Eurozone. The prospect of a structured peace plan raises hopes that these issues will be resolved, which, in turn, strengthens the Euro.

If a truce is reached, the Eurozone’s supply chain mechanisms could stabilize, leading to lower energy prices and improved industrial output. Investors are reacting positively to the possibility of a geopolitical resolution, leading to increased demand for the Euro against the US Dollar.

2. ECB Rate Cut Expectations

The European Central Bank is almost certain to cut interest rates again this week, with markets pricing in a 25-bps reduction. The ECB has been in an easing cycle due to concerns about slowing economic growth in the Eurozone.

Recent data shows that Eurozone inflation, as measured by the Harmonized Index of Consumer Prices (HICP), slowed in February. Headline inflation rose by 2.4%, slightly above the estimated 2.3% but lower than the 2.5% recorded in January. Core inflation, which excludes volatile food and energy prices, also slowed from 2.7% to 2.6%. While inflation remains relatively high, the ECB sees enough room to cut rates to support economic growth.

The expectation of lower interest rates generally weakens a currency. However, in this case, the Euro is strengthening because investors believe the ECB’s rate cuts will help stabilize the economy in the long run.

Furthermore, if the Federal Reserve (Fed) also cuts rates later this year, the interest rate differential between the ECB and Fed would remain balanced, limiting downside risks for the Euro.

US Dollar Weakness Supports EURUSD Gains

The other key factor behind the EURUSD rally is the decline in the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s performance against major currencies, has dropped from its two-week high of 107.65 to around 107.00. Several factors are contributing to the Dollar’s decline:

1. Uncertainty Over Trump’s Tariffs on Canada and Mexico

The initial announcement of tariffs by US President Donald Trump on Canada and Mexico had created market anxiety. However, recent comments from US Commerce Secretary Howard Lutnick suggest that the tariffs may not be as severe as feared. Lutnick confirmed that tariffs are coming but was uncertain whether they would be set at 25% or lower.

Markets had been bracing for the worst after Trump’s social media post hinted at aggressive tariffs on Canada, Mexico, and China. However, the latest remarks have eased investor concerns, leading to a decline in demand for the safe-haven US Dollar. If the tariffs are lower than expected, trade tensions could de-escalate, reducing fears of economic disruption.

2. Rising Odds of a Fed Rate Cut in June

The likelihood of a Federal Reserve interest rate cut in June has increased significantly, further pressuring the US Dollar. According to the CME FedWatch Tool, there is now a 77% chance of a rate cut in June, up from 63% last week.

This shift in expectations comes after weaker-than-expected Personal Spending data for January. The data showed a decline in consumer spending for the first time since March 2023, signaling that high interest rates may be starting to weigh on economic activity. If economic conditions soften further, the Fed could be forced to lower borrowing costs to support growth.

A potential rate cut by the Fed would narrow the interest rate gap between the US and Eurozone, making the Euro more attractive to investors. This dynamic is contributing to the EURUSD rally.

Key Economic Events to Watch This Week

The EURUSD pair will likely remain volatile this week, as investors focus on several major economic events:

1. ECB Monetary Policy Decision (Thursday, March 7)

The ECB’s decision and President Christine Lagarde’s remarks will be crucial in shaping market expectations. While a 25-bps rate cut is widely expected, traders will pay close attention to Lagarde’s forward guidance. If she signals further rate cuts, the Euro may face some downside risks. However, if she adopts a cautious stance, the Euro could maintain its recent strength.

2. US Nonfarm Payrolls (Friday, March 8)

The US labor market remains a key factor in the Fed’s policy decisions. A strong jobs report could reduce the chances of a Fed rate cut, potentially strengthening the US Dollar. Conversely, weaker job growth could reinforce expectations of Fed easing, supporting EURUSD upside.

3. US ISM Manufacturing PMI (Monday, March 4)

Investors will also watch the US ISM and revised S&P Global Manufacturing PMI data, which will provide insights into the health of the US economy. A slowdown in manufacturing activity could add to concerns about economic weakness, increasing the likelihood of a Fed rate cut.

Technical Outlook: EURUSD Eyes 1.0500 Resistance

From a technical perspective, EURUSD has rebounded from its two-week low of 1.0360 and is currently trading near 1.0450. If bullish momentum continues, the next key resistance level is around 1.0500. A break above this level could open the door for further gains toward 1.0550.

On the downside, initial support seen at 1.0400, followed by 1.0360. If the pair falls below these levels, it could signal a deeper correction toward 1.0300.

Conclusion

The EURUSD pair is benefiting from a combination of factors, including optimism over a potential Ukraine peace plan, expectations of an ECB rate cut, and a weaker US Dollar. While the Euro remains supported by improving sentiment, traders will closely watch upcoming economic data and central bank decisions for further direction.

If the ECB signals a more cautious approach to rate cuts and US economic data weakens, the Euro could continue to gain ground. However, any surprises from the Fed or unexpected developments in trade policy could lead to sharp moves in the currency pair.

For now, the market’s focus remains on geopolitical developments, ECB policy, and US economic indicators, all of which will play a crucial role in shaping the next move in EURUSD.