EUR/USD Weekly Outlook – January 20, 2025: Parity in Sight as Dollar Strengthens Amid Global Economic Shifts

• Trump’s inauguration coincides with a Middle East cease fire agreement and better-than-expected U.S. inflation data, raising hopes for a more dovish Federal Reserve stance on interest rates.
• Germany is set to enter its second consecutive year of recession, prompting the ECB to act further on rates in upcoming meetings.
• EUR/USD bounces off the last support levels before parity. However, the trend remains decidedly bearish for the currency pair.

Trump’s Inauguration and Inflation Data Drive Forex Volatility

Middle East case fire agreements and better-than-expected inflation data greet Donald Trump’s inauguration at the White House. He will immediately face critical issues, including the ongoing war in Ukraine and trade tariffs. The forex market continues to exhibit high volatility, especially following news of potential protectionist moves. Last week, the focus was on U.S. inflation data. Consumer prices accelerated to 2.9% from 2.7% in November, in line with expectations. The core figure (3.3%) rose less than anticipated, prompting profit-taking on the dollar, and leading to a rebound in both bonds and the tech-heavy stock market. Earlier, the producer price data also confirmed the slowdown. Though still above 3%, both headline and core producer prices came in lower than expected, increasing by 3.3% and 3.5%, respectively. Leading indicators, such as the New York Empire data, showed somewhat disappointing numbers, which led traders to predict a less aggressive stance on rates from the Fed in the coming months. Prior to the inflation data, the next rate cut was forecasted for September, but now it has been shifted to July. In Europe, the policy of rate cuts is expected to continue, though markets now project the terminal rate at 2%, rather than the 1.5% previously estimated in December. Germany is set to enter a recession for the second consecutive year in 2024, with GDP shrinking by 0.2%, following a decline of 0.3% in 2023.

Technical Analysis: EUR/USD Faces Key Support as Parity Approaches

Technically, after breaking through 1.08 and then 1.05, we pointed to parity as an almost inevitable destination for EUR/USD. The current technical structure still suggests that zero will likely be the first number of the terminal target for this move. The single currency is desperately clinging to its last technical support before this scenario, with inflation data postponing the inevitable arrival at parity. The key level is 1.02, representing the 61.8% retracement of the entire rally from 0.953 in 2022 to 1.128. Only a quick return above 1.045/1.05 would trigger a formal bear trap, but at this point, we assign little credibility to this scenario.

The long-term EUR/USD chart leaves little doubt about the formalization of a double top in the currency pair during 2023. The theoretical target of this pattern lies around 0.97/0.98. A move back above 1.05 would put the entire technical structure at risk. For now, any pullback to this resistance level should be viewed as an opportunity to strengthen long dollar positions, with a strict stop placed a few pips above 1.075—currently the key level to consider as the “line in the sand” for the bear market’s durability.