28.02.202500:34 Forex Analysis & Reviews: The Dollar Is Currently Facing Significant Challenges

Concerns about the state of the US economy are hindering bearish sentiment in the market for EUR/USD. According to Danske Bank, the major currency pair lacks serious catalysts to move out of its current consolidation phase and is expected to continue fluctuating around the 1.05 mark.

President Donald Trump is either imposing tariffs or delaying their implementation. The 25% import duties on Mexico and Canada were initially set to take effect on February 1 but have since been postponed to March 1. Trump's team will discuss the matter on April 2. However, sources have indicated to Bloomberg that the timeline is still uncertain. Trump could choose to impose the tariffs either in April or March. Additionally, his announcement of introducing 25% tariffs on the European Union has reignited investor interest in selling EUR/USD.

Unfortunately, the enthusiasm of the bears regarding the euro was short-lived. The major currency pair has quickly recovered as signs of a slowdown in the U.S. economy come to light. Data on retail sales, business activity, and consumer confidence support this trend. Consequently, the short-term market is starting to believe that the Federal Reserve is shifting its focus from inflation to GDP, as indicated by the movements in U.S. Treasury yields.

U.S. Bond Yield Dynamics

Atlanta Fed Bank President Rafael Bostic has argued that since the Fed has already met its employment target, it's time to focus on inflation. This perspective seems to contradict current market signals and recalls the strength of the US dollar. According to Societe Generale, this approach may be misguided, as current EUR/USD quotes are near fundamental levels, indicating limited potential for significant fluctuations in this major currency pair.

Moreover, the uncertainty surrounding tariffs introduced by Donald Trump and his administration has provided support for the US dollar. However, investors are well aware of the potential consequences of trade wars and an elevated federal funds rate, which could lead to a hard landing. This is evidenced by the caution exhibited by the bulls in the EUR/USD market.

Will the upcoming releases of GDP and the U.S. Personal Consumption Expenditure (PCE) index serve as catalysts to break the major currency pair out of its short-term consolidation range? Personally, I highly doubt it. Both indicators are lagging. This is particularly true given that we are not dealing with the first estimate of gross domestic product. Furthermore, even a slowdown in the PCE is unlikely to alter the market's perception of the Fed's monetary expansion actions in 2025.

From a technical standpoint, the daily EUR/USD chart shows continued short-term consolidation near the upper boundary of the fair value range, which spans from 1.0340 to 1.0515. A breakout above the resistance level at 1.0515 could increase the likelihood of an uptrend resuming, presenting a buying opportunity for the Euro. Conversely, a successful move below the support level at 1.0450 would signal a basis for selling.