EURUSD Poised for More Gains Amid Soft US Inflation and Eurozone Optimism.

EURUSD pair has been rallying, approaching a five-month high around 1.0920 during North American trading on Wednesday. This comes after the release of the US Consumer Price Index (CPI) report for February, which indicated that inflation is slowing at a faster pace than expected. The softer inflation data has reinforced market speculation that the Federal Reserve (Fed) may cut interest rates as soon as May, putting downward pressure on the US Dollar (USD) and supporting the Euro (EUR).

Additionally, positive developments in the Eurozone, including hopes of a Ukraine ceasefire and Germany’s debt restructuring plan, have further strengthened the EURUSD pair. At the same time, concerns about US recession risks and President Trump’s tariff policies continue to weigh on the Greenback, keeping it on the defensive.

US Inflation Slows, Boosting Rate Cut Expectations

The latest US CPI data showed that headline inflation increased by 2.8% year-over-year, below the expected 2.9% and down from 3% in January. The core CPI, which excludes volatile food and energy prices, rose by 3.1%, also below the forecast of 3.2% and the previous 3.3%. On a monthly basis, both headline and core CPI grew by 0.2%, softer than the expected 0.3% rise.

These figures indicate that inflationary pressures in the US economy are cooling, giving the Fed more room to ease monetary policy. With inflation slowing, traders are increasing bets that the Fed will begin cutting interest rates at its May policy meeting, which is causing the US Dollar to weaken.

US Dollar Struggles Near Four-Month Low

The US Dollar Index (DXY), which measures the USD against a basket of six major currencies, is hovering near a four-month low around 103.20. The Greenback has been on a downward trajectory in recent weeks, largely due to growing economic uncertainty and dovish Fed expectations.

Adding to the USD’s woes is rising speculation about a possible US recession. On Tuesday, US Commerce Secretary Howard Lutnick acknowledged in a CBS interview that President Trump’s economic policies could trigger a recession, but insisted they are “worth it.” Investors are increasingly concerned that Trump’s protectionist policies, including higher tariffs and trade restrictions, could hurt US economic growth and increase inflationary pressures in the long run.

Euro Gains Strength from German Debt Plans and Ukraine Ceasefire

While the US Dollar remains under pressure, the Euro has been strengthening on the back of positive developments in the Eurozone. One of the key factors driving EURUSD higher is Germany’s proposed debt restructuring plan, which could pave the way for increased defense spending and economic stimulus.

On Thursday, Germany’s Green Party, led by Franziska Brantner, is set to discuss debt restructuring negotiations with likely next Chancellor Friedrich Merz and Social Democratic Party (SPD) co-leader Lars Klingbeil. Investors believe that relaxing Germany’s strict “debt brake” rule could provide a much-needed boost to the Eurozone economy, potentially leading to higher growth and inflation, and forcing the European Central Bank (ECB) to reconsider its monetary policy stance.

Another major driver of Euro strength is growing optimism over a ceasefire in Ukraine. On Tuesday, Ukraine agreed to a 30-day ceasefire following talks with US officials in Saudi Arabia. US Secretary of State Marco Rubio has indicated that he will present the ceasefire proposal to Russia. If the proposal gains traction, it could ease geopolitical tensions in Europe, supporting the Euro.

Trump’s Tariff Policies Add Volatility to Markets

While a potential Ukraine ceasefire and German debt reforms are boosting the Euro, President Trump’s tariff policies continue to inject uncertainty into financial markets. On Tuesday, Canada’s Ontario Premier Doug Ford rolled back a 25% surcharge on electricity exports to the US after Trump threatened to increase tariffs on Canadian steel and aluminum imports to 50%.

Trump’s aggressive trade policies have been a key risk factor for the global economy. While they may give the US a stronger negotiating position with its trading partners, they also contribute to inflationary pressures and supply chain disruptions, potentially weighing on economic growth.

ECB’s Rate Path Uncertain Amid Eurozone Developments

While the US Federal Reserve is expected to cut interest rates, the European Central Bank (ECB) remains cautious about its next steps. ECB policymakers have signaled that the rate path is clearly on the downside, but recent Eurozone developments could complicate the outlook.

If Germany’s debt restructuring plan and defense spending deal lead to a stronger economic recovery, the ECB may need to reassess its policy approach. A stronger Eurozone economy would reduce the need for aggressive rate cuts, providing additional support to the Euro.

Market Outlook: Further Upside for EURUSD?

With US recession fears rising, the Fed leaning towards rate cuts, and the Euro benefiting from geopolitical optimism and economic reforms, the EURUSD pair could continue its upward momentum.

Key factors to watch in the coming days include:

1. The Fed’s stance on rate cuts – If the Fed signals an even more dovish policy, the USD could weaken further.

2. Developments in Germany’s debt restructuring talks – A breakthrough could support the Euro.

3. Progress on the Ukraine ceasefire – A confirmed truce would further boost market confidence.

4. Trump’s tariff policies – Any new trade measures could create volatility in currency markets.

Conclusion

The EURUSD pair has been rallying on a combination of factors, including softer US inflation, rising Fed rate cut expectations, German economic policy optimism, and geopolitical stability hopes in Ukraine. Meanwhile, the US Dollar remains on the back foot due to recession fears and trade tensions.

If these trends continue, the EURUSD could push higher, potentially testing the next psychological resistance levels above 1.0920. However, traders should stay cautious as geopolitical risks and policy shifts could introduce volatility in the weeks ahead.