- Since the start of this week’s trading, the EUR/USD pair has been attempting to rebound upwards, with gains reaching the resistance level of 1.0528, the pair’s highest in over a month.
- The Euro’s gains were fueled by optimism regarding increased fiscal spending in Germany, following reports that Europe’s largest economy is considering establishing a €200 billion emergency defense fund.
- Additionally, Friedrich Merz (CDU), the potential future German Chancellor, did not rule out the possibility of reforming the debt brake system to finance key measures, including tax relief, lower energy prices, and a significant increase in military spending.
European Central Bank Policies Under the Microscope
On another level affecting the performance of the EUR/USD, investors analysed the main speeches of European Central Bank officials before the policy meeting next week, where the ECB is widely expected to cut interest rates for the fifth time in a row. Meanwhile, European Central Bank policymaker Joachim Nagel has suggested that further rate cuts remain on the table if inflation continues to slip towards the 2% target. However, his colleague Isabel Schnabel told the Financial Times that the ECB is approaching a point where it may need to pause or stop rate cuts.
Trading Tips:
Dear TradersUp follower, the EUR/USD pair is at an important crossroads, considering that the factors of the US dollar’s strength are important and may continue to exceed the euro.
Cautious performance of European stock markets
During yesterday’s trading on stock trading platforms, European stocks closed stable for the fourth consecutive session of muted movement as financial markets continued to assess the prospects of higher government spending by European governments and the impact of trade barriers imposed by the United States. The Euro Stoxx 50 index closed down 0.1% at 5448, and the European Stoxx 600 index rose 0.2% to close at 554.
German carmakers were among the biggest gainers despite US President Trump saying the US was prepared to follow through on previous tariff threats on Mexico, a major manufacturing hub for European automakers. Volkswagen, BMW and Mercedes-Benz rose between 3.6% and 1.5%. Meanwhile, the banking sector performed well with UniCredit, Intesa Sanpaolo and BNP Paribas up around 2%. Meanwhile, ASML and Infineon fell around 3% after the US president threatened to impose restrictions on China’s technology industry. Novo Nordisk also rose 3% after US-based Hims & Hers said it may stop selling alternatives to Wegovy.
Euro Forecast Under the New German Government
According to Forex market experts, Germany’s economic path – and thus the Euro’s stability – may depend on whether Friedrich Merz’s proposed “Agenda 2030” can inject new momentum into Europe’s largest economy. The CDU leader has outlined a package of growth-supporting reforms, including tax cuts, deregulation, and lower energy costs, aiming to lift Germany from what some economists have called a “lost decade.” Currency analysts at Commerzbank believe that “the performance of the German economy is important for Euro exchange rates, as it affects the overall growth of the Eurozone and thus possibly the ECB’s monetary policy.”
Agenda 2030 acknowledges that “Germany has lost three years… and we need a political shift that will restore competitiveness and prosperity.”
In general, a key pillar of Merz’s economic strategy is to cut the corporate tax rate to 25% and scrap the solidarity tax – a move aimed at boosting business investment and reversing the country’s deindustrialization. However, Merz’s ability to deliver his package will depend on the SPD’s willingness to embrace reforms.
The CDU/CSU is set to enter negotiations with the centre-left SPD in hopes of forming a government, and ideological stances could lead the upcoming government to fail to adopt many reforms. Euro “bulls” are likely to want to see as much of Agenda 2030 survive the negotiations as possible.
Also, the quality of German debt – German bunds – is important for the euro, analysts add. “The ‘safe haven’ quality of German bonds weakens if concerns about continued weak growth erode the perceived credit quality and resilience of the German Treasury to crises.”
Beyond tax and energy reform, Merz’s “Agenda 2030” promises to prioritise innovation through a federal digital ministry and increase spending on artificial intelligence, cloud computing and aerospace technology. The CDU/CSU coalitions aim to ensure that Germany spends at least 3.5% of its GDP on R&D by 2030. Merz’s plan includes a “startup protection zone” to encourage startups, largely exempting new companies from bureaucratic restrictions in their early years.
Overall, given that Germany represents nearly 30% of the Eurozone’s GDP, the success of Agenda 2030 could have far-reaching implications for the European economy and the Euro. However, challenges remain. Critics question whether Germany can afford tax cuts while maintaining strict debt rules, and the political feasibility of reviving nuclear energy remains uncertain.
Nevertheless, with the Eurozone’s largest economy facing stagnation, investors and policymakers alike will be closely watching to see if Merz’s plan gains momentum.
EUR/USD Technical Analysis Today:
Dear reader, according to the daily chart trading, the EUR/USD currency pair is at the beginning of a general trend change to bullish. The bulls’ control of the trend will be confirmed if the Euro Dollar moves towards the resistance levels of 1.0630 and 1.0750 respectively, which are also sufficient to push technical indicators towards strong overbought levels. Obviously, we still prefer to sell the Euro Dollar from every upward level. Conversely, and over the same time frame, the return of the Euro Dollar towards the support level of 1.0380 will be important for stronger bear control over the general trend.
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