EUR/USD remains steady at 1.1850 after falling 1%, even though Eurozone manufacturing PMIs came in better than expected. The Euro is weaker against the US Dollar, primarily due to the nomination of Kevin Warsh as the next Federal Reserve Chair and a market that favors caution. Warsh’s appointment has been confirmed, easing concerns as he is likely to adopt a careful approach to inflation. Positive news from Europe includes an increase in the Eurozone PMI to 49.5 and a rise in German PMI to 49.1.

Anticipation Builds Before Key Economic Data

Investors are waiting for US manufacturing data while staying cautious ahead of the ECB’s upcoming monetary policy announcement and the US Nonfarm Payrolls report. German Retail Sales improved by 0.1% in December, exceeding expectations. There’s also an expectation for a slight rise in the US ISM Manufacturing PMI. Technically, EUR/USD is positioned above 1.1835 in a bearish correction after dropping from nearly 1.2100. The pair is aiming for 1.1770, with resistance at 1.1955 and 1.2000. The ISM Manufacturing PMI, released monthly, is essential for tracking US manufacturing activity, with readings above 50 showing growth. The ISM Prices Paid index reflects business sentiment about inflation, impacting USD performance. The latest US ISM Manufacturing PMI data came in at 52.6, significantly higher than the expected 48.5. This marks the first reading above 50.0 in 16 months, indicating a strong recovery in the US manufacturing sector. Such unexpected strength is a bullish signal for the US Dollar, putting pressure on the EUR/USD pair. We should reassess the market’s expectations of two Federal Reserve rate cuts for 2026. With Kevin Warsh’s appointment, which reflects sensitivity to inflation, and robust economic data, a dovish shift seems less likely. Looking back to 2025, we saw how rapidly market expectations for the Fed changed, and something similar could happen now.

Market Dynamics and Potential Strategies

While the upward revisions for Eurozone and German manufacturing PMIs are encouraging, they are overshadowed by US performance. Germany’s PMI of 49.1 indicates contraction, making the Euro’s fundamentals appear weaker compared to the growing US economy. The ECB’s decision on Thursday will be important, but it likely won’t be enough to counter the dollar’s strength. The sharp rise in the ISM Prices Paid component suggests ongoing inflation that the new Fed leadership cannot ignore. This reflects the persistent inflation seen in parts of 2025, indicating that the fight against inflation is far from over. This gives the Federal Reserve strong reasons to remain cautious and postpone any potential rate cuts. Considering the bearish technical setup and strong support for the dollar, it makes sense to position for further declines in EUR/USD. Buying puts with strike prices below 1.1800 could directly benefit from this anticipated weakness. Alternatively, using a bear put spread could target movement toward the 1.1770 support level while managing costs. This week’s key focus is on the ECB decision and, notably, the US Nonfarm Payrolls report on Friday. The January NFP report showed a surprisingly strong gain of 285,000 jobs; another strong reading would reinforce the dollar’s strength. These events are likely to create significant volatility, serving as catalysts for the next major market movement. We are monitoring the critical support level at 1.1830, aligning with the 50% Fibonacci retracement. A decisive break below this level could lead to a major target at 1.1770. Any upward movements are likely to be seen as selling opportunities, with resistance anticipated around 1.1950. Create your live VT Markets account and start trading now.

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