20.02.202500:19 Forex Analysis & Reviews: Euro Returns to Reality

Hope for the best, prepare for the worst. Currently, markets are optimistic—anticipating peace in Ukraine and a boost to Germany's economy through fiscal stimulus from the new ruling party. This optimism has allowed EUR/USD to temporarily break above 1.05. However, investor skepticism is growing, and due to the euro's various vulnerabilities, the major currency pair is now facing a decline.

Can the conflict in Ukraine be resolved without Ukraine's involvement? The U.S. and Russia are discussing the situation without Kyiv or Brussels at the table, which raises serious concerns. Investors believe that Donald Trump could bring about a resolution, but based on his past tariff policies, this outcome is uncertain. If the process experiences delays, it could lead to investor disappointment, a downturn in global risk sentiment, and a decline in EUR/USD.

Recent polls suggest that the conservative opposition party, led by Friedrich Merz, is likely to win, but it probably won't secure a parliamentary majority in the elections on February 23. A coalition will be necessary, and concerns about Berlin's ability to form one are putting pressure on the euro. Such an outcome would not only hinder support for Germany's struggling economy but also leave Europe without a unified stance against Donald Trump's protectionist policies.

Dynamics of German Political Party Poll Trends

Meanwhile, the U.S. president continues to push for tariffs, now threatening a 25% duty on automobile imports, which would be another blow to Germany's already weakened auto industry. Currently, the EU imposes a 10% tariff on U.S. car imports, whereas U.S. duties are only 2.5%. One would expect Brussels to consider lowering tariffs in response. Especially since Trump has already claimed such reductions are in effect despite no actual change. However, if tariff reductions must apply to the U.S. and other WTO member countries, will Europe agree to such terms?

Isabel Schnabel, a member of the European Central Bank Governing Council, has suggested that following the anticipated rate cut in March, it may be time to pause the monetary easing cycle. She argues that the deposit rate will no longer be as restrictive for the eurozone economy as it has been in the past. Analysts at Bloomberg predict that there will be three rate cuts in 2025, with one cut expected at each of the next three ECB meetings. If the ECB signals a pause, it could provide support for EUR/USD bulls.

Dynamics of the ECB Rate and Forecasts

The Federal Reserve has already paused its easing cycle. However, if inflation in the U.S. continues to slow down, the Fed may consider resuming monetary expansion. Insights regarding future policy decisions may be revealed in the minutes from the latest FOMC meeting.

On the daily chart, a rebound from the upper boundary of the 1.033–1.050 range, followed by a return to fair value, suggests that bulls struggle to sustain a proper correction. A break below the 1.042 support level would become the basis for the formation of short positions, while a rebound from this level could justify renewed long positions.