EUR/USD Recovery Maintains Momentum, but Fed/ECB Policy Divergence Could Limit Gains

EUR/USD regained momentum after an overnight dip, climbing back above the 1.05 level and breaking into the falling daily cloud (spanning 1.0490 to 1.0664) following a better-than-expected German Ifo report for January, which lifted market sentiment.

The pair appears poised to extend its recovery from the January 13 low of 1.0177, supported by the completion of a reversal pattern on the weekly chart. Last week’s 2.1% gain marked the strongest weekly advance since mid-July 2023.

Positive daily technical signals underpin the current action, with the Tenkan and Kijun-sen lines converging after forming a bullish crossover and strong momentum building. A sustained break above the Fibonacci barrier at 1.0573 (38.2% retracement of the 1.1214–1.0177 drop) is needed to confirm the recovery and target further resistance at 1.0629/1.0656 (December 6 lower top and cloud top).

However, the recovery faces potential headwinds due to the divergence in monetary policies between the Federal Reserve and the European Central Bank. The Fed is expected to hold rates steady at its meeting on Wednesday, while the ECB’s fully priced rate cut on Thursday adds uncertainty.

The policy easing dynamics favor the ECB, with expectations of a 75-basis-point reduction by June, compared to the Fed’s anticipated 50-basis-point cut in 2025, which could potentially be delayed until after mid-year.

Res: 1.0534; 1.0573; 1.0629; 1.0656
Sup: 1.0490; 1.0454; 1.0422; 1.0396