EUR/USD Forecast: Euro Extends Rally as Dollar Dips - Key Scenarios to Watch

Jasper Osita - Market Analyst

2025-07-02 14:26:32

EUR/USD hits multi-year highs, driven by dollar weakness and eurozone inflation hitting target.
U.S. data, Fed signals, and tariff risks pose major catalysts for volatility this week.
Key inflection zone near 1.1800 could decide whether bulls extend or bears reclaim control.

Dollar Weakness Boosts Euro

The euro continues to climb against a softening U.S. dollar, extending its bullish streak to nine consecutive days—its longest since 2009. Dollar is experiencing a continued slump as it fails to gain traction with bets on a weaker dollar due to impending rate cuts in the coming months, particularly, September and, potentially, October or December.

Fundamentals Driving the USD: Tariff Threats, Soft Data, and Fed Uncertainty

The U.S. dollar remains under pressure amid the “double-threat” of headwinds:

Trade policy tension: Trump’s looming tariff deadline (July 9) has sparked renewed fears of global trade disruption. Markets are cautious about retaliatory moves, especially from Asia and the EU.
Fed hesitation: Chair Powell struck a more cautious tone at the Sintra Forum, warning that tariffs are raising inflation risks, making near-term rate cuts less certain despite market expectations.

With EUR/USD breaking above key resistance near 1.1800, the question now: Is this momentum sustainable, or is a short-term pullback due as the dollar fights back on data and macro risk events?

EUR/USD Catches a Tailwind - But Enters Overstretched Territory

EUR/USD surged to fresh multi-year highs near 1.1830, supported by a weakening dollar, stabilizing eurozone data, and growing expectations of a dovish pivot by the Fed. However, as the euro tests levels not seen since September 2021, the pair now enters a high-risk zone for profit-taking or reversal—especially as U.S. data and Fed signals start to re-enter the spotlight.

Note: Overstretched does not mean, market is now up for reversal.

These developments have led to renewed yield curve compression and a retreat in U.S. bond yields, dragging the dollar lower across the board.

Impact on the Euro: Tailwinds from Inflation and Fiscal Shifts

The euro’s rally isn’t just a function of dollar weakness - it’s also being underpinned by improving eurozone fundamentals:

Eurozone inflation hit 2%, meeting the ECB’s target for the first time in over a year. President Lagarde signaled optimism but warned of volatility from U.S. trade policy and FX movements.
Fiscal policy shift: Key EU nations, led by France and Germany, are pivoting toward fiscal stimulus especially in defense, infrastructure, and AI—boosting investor sentiment in eurozone assets.
Relative resilience: With energy prices stabilizing and growth forecasts leveling, the euro is seen as a relatively safe play amid global uncertainty.

Still, ECB policymakers are growing concerned about the euro’s strength up nearly 9% since April which could weigh on exports and trigger verbal intervention if the rally continues unchecked.

Technical Outlook: EUR/USD Bullish Bias but Watch for Pullback

Bullish Scenario

EUR/USD remains in bullish structure on the 4H timeframe and is currently forming a consolidation range just above the Fair Value Gap (FVG) and a prior support zone. Euro upside is still intact with:

Potential retracement to the FVG + Support Level at 1.17327-1.17607
Price respects this support and shows signs of bullish rejection
Euro returns and stays above 1.18 level

Targets:

1.183 Resistance Level
1.185 Psych Level
1.190 Multi-Year High Psych Level

Bearish Scenario

While EUR/USD remains bullish on the higher timeframe, the 4H chart shows signs of distribution within a consolidation range just above the Fair Value Gap (FVG). If:

Price fails to break and hold above 1.18 level
Fair Value Gap level breaks 1.17327-1.17607

Targets:

1.173 FVG Bottom
1.172 Previous Equilibrium Level
1.168 Previous Bottom Range Level

Final Thought

The euro may still have room to climb, but downside risks are still on the table. With U.S. data releases, Fed commentary, and trade policy developments all in play, EUR/USD is approaching a critical inflection point above 1.1800, where momentum could either extend or unravel.

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This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplies by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.

Auteur

Jasper has been in the markets since 2019 trading currencies, indices and commodities like Gold. His approach in the market is heavily accompanied by technical analysis and of course, supported by fundamentals. He has a background in trading proprietary firms and has been teaching students how to navigate themselves in the markets from basic to advance concepts.

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EUR/USD Forecast: Euro Extends Rally as Dollar Dips - Key Scenarios to Watch

Dollar Weakness Boosts Euro

Fundamentals Driving the USD: Tariff Threats, Soft Data, and Fed Uncertainty

EUR/USD Catches a Tailwind - But Enters Overstretched Territory

Impact on the Euro: Tailwinds from Inflation and Fiscal Shifts

Technical Outlook: EUR/USD Bullish Bias but Watch for Pullback

Bullish Scenario

Bearish Scenario

Final Thought

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