The EUR/USD currency pair has been on an upward trajectory, fueled by significant developments in both the European and U.S. economic landscapes. Last week, we made a substantial upward revision to our forecasts, primarily due to the emerging consensus among Germany’s incoming coalition government to modify the country’s debt brake and implement robust fiscal spending. This policy shift has the potential to provide a significant boost to the Eurozone’s economic outlook.

A Sustained Uptrend with No Pullback Yet

While we anticipated a possible period of consolidation or short-term pullbacks following the recent rise in EUR/USD, the absence of any meaningful correction suggests strong bullish momentum. Traders and investors appear confident in the Euro’s strength, and upcoming U.S. economic data could be a key factor in determining the pair’s next move.

Tomorrow, the release of U.S. CPI inflation data will be a critical test for EUR/USD bulls. Market consensus suggests that inflation may ease slightly, but varying opinions exist, as reflected in the Bloomberg economists’ survey. If inflation data aligns with the median expectation, the Federal Reserve is likely to remain cautious about cutting interest rates as aggressively as markets have been pricing in. That said, investors have increasingly turned their attention to U.S. growth risks rather than Fed rate decisions alone.

U.S. Growth Risks and Market Drivers

The recalibration of market sentiment regarding U.S. economic growth has largely been influenced by concerns over trade policies and government spending cuts. The proposed tariffs by former President Trump and fiscal tightening measures have contributed to market apprehension. At the same time, other factors are reshaping global investment flows.

One major development is the potential rise of low-cost AI technology in China, prompting a reassessment of tech investment strategies. Meanwhile, Germany’s expected fiscal stimulus has sparked optimism about Eurozone growth prospects. These shifts are evident in stock market movements: year-to-date, the Nasdaq has dropped by approximately 9.5%, while the Hang Seng has surged by 18.5%, and Germany’s DAX has climbed about 14%. Such trends highlight growing confidence in European economic recovery.

Germany’s Political and Economic Landscape

German economic sentiment has been on an upswing, as seen in last month’s ZEW index, which recorded its fastest improvement in two years. This optimism stemmed from expectations that Germany’s new government would boost public investment. Initially, uncertainty surrounded the stance of Friedrich Merz on the debt brake; however, recent signals from Germany’s Green Party suggest that negotiations on fiscal and defense policy remain open, reinforcing the likelihood of a more expansionary fiscal stance.

Despite this, challenges remain. Former ECB Governor Mario Draghi recently emphasized the need for regulatory reform to enhance domestic demand within the EU. Additionally, uncertainty surrounds U.S. defense commitments to Ukraine, which could shape European defense spending. Another looming risk is the potential for U.S. tariffs on European goods, which could slow economic growth while simultaneously driving inflation higher if reciprocal tariffs are introduced.

Looking Ahead: Key Levels for EUR/USD

On balance, we maintain our updated target for EUR/USD at 1.12. While this week’s market activity has challenged our expectations for a short-term pullback, the focus now shifts to tomorrow’s U.S. CPI inflation data and potential Fed reactions. If markets begin to reassess their aggressive expectations for Fed rate cuts, the USD could find renewed support, potentially tempering the Euro’s rally.

Overall, the interplay between U.S. inflation trends, Fed policy, and European fiscal developments will be crucial in determining the next phase of EUR/USD’s trajectory. Investors should stay alert for upcoming data releases and geopolitical developments that could shift sentiment in the weeks ahead.