EUR/USD expected to continue uptrend after recent short-term correction

THE euro is the second most traded currency by volume globally and forms the most actively traded currency pair with the US dollar. It is also widely held as a global reserve currency, serving as the common legal tender across the eurozone. Rising geopolitical risks in the United States have fuelled discussions around de-dollarisation, positioning the euro as a potential alternative reserve currency.

The EUR/USD reflects the relative strength of both currencies, with trading themes often revolving around the psychologically significant 1:1 parity level.

Historically, EUR/USD generally trades above the 1.00 level, meaning one euro is worth more than one US dollar. In 2022, however, the pair fell below the parity level and before recovering to the 1.05 range by year-end. It was approaching towards parity again in early 2025 but subsequently rallied sharply towards 1.18. The recent high of 1.204 marks a level close to a five-year high, largely driven by evolving geopolitical and macroeconomic developments in the US.

The US dollar’s strong depreciation

In 2025, the Federal Reserve reduced interest rates from 4.5 per cent to 3.75 per cent, while the European Central Bank (ECB) lowered interest rates from 3.15 per cent to 2.15 per cent. The lower US interest rates have led to investors moving funds into other currencies and foreign-denominated funds for a higher interest differential. US inflation currently hovers around 2-3 per cent while the eurozone’s latest inflation data stands at 1.7 per cent. The ECB’s inflation target also faces challenges amid the strong appreciation of the euro as it is currently lowering interest rates to stimulate inflationary growth.

One of the contributions to depreciation of the US dollar is the growing political risk. The US Economic Policy Uncertainty Index has more than doubled compared to levels seen during the Covid period. Protectionist tariffs and immigration restrictions have led to supply chain disruptions contributing to inflation in the US. While the eurozone is not immune to US trade policies, stronger-than-expected GDP growth in recent quarters has demonstrated relative economic resilience, further supporting the euro’s recent strength.

Bullish EUR/USD scenario

The key technical level is still 1.18. In 2025, prices rebounded from the 1.18 level on three separate occasions, with only one brief breakout above this level before retreating within two days. The recent high above 1.20 now serves as a reference point for potential upside movement in EUR/USD, supported by the broader recovery seen across equities, commodities and metals. The dollar index has also reversed from its recent peak of 98 and is currently trending lower in the short term, supporting the upside movement of EUR/USD.

EUR/USD dipped below 1.18 recently but remained above the 20-day moving average (MA). The latest candlestick has opened above the 1.18 level, signalling the continuation of the broader uptrend after the recent short-term correction. EUR/USD is trading within its 10-day MA and 20-day MA with the 10-day MA still above the 20-day MA. The stochastic oscillator also indicates a possible start of the reversal, with the %K line crossing above the oversold region.

Bearish EUR/USD scenario

If prices fail to sustain above the 1.18 level, the next immediate support lies at 1.16. The upward trendline covers the 1.16 from the last rally in January 2026. The next support level below 1.16 would be 1.14 and 1.115. These levels previously acted as strong reversal zones where buyers stepped in to hold prices.

Additionally, if inflation persistently undershoots the ECB’s target, further monetary easing in the eurozone could potentially weaken the euro to the 1.14 level.

Note: This article was written on Feb 9

The writer is dealer, contract for differences, at Phillip Securities