On Tuesday (March 4th) during the European session, the US dollar index closed at 106.2083/621, a decrease of 0.28%. At a time when the new round of tariff measures in the United States and Canada has officially come into effect and global trade frictions are resurging, the euro/dollar has shown strong performance. Market analysis suggests that the Trump administration's tariff measures on Canada and Mexico have exacerbated global trade tensions, providing potential support for the euro.

The economic growth expectations of the United States and Europe reversed, the market's confidence in the United States weakened, and optimism about Europe increased, partly because of increased military spending to resolve the Russia-Ukraine conflict.

Growth expectations diverge, breaking the bearish trend of EUR/USD

For a long time, the market has believed that the US economy is performing exceptionally well, but this view is being seriously challenged. Not only has the recent economic data been consistently below expectations, reaching the worst level since the Federal Reserve began cutting interest rates in September last year, but the Atlanta Fed's GDP forecast model shows that the quarterly annualized growth rate of US GDP in the first quarter is expected to be -2.8%.

At the same time, the economic data performance in Europe has reached its highest level in nearly a year, mainly reflecting the already low economic expectations in Europe, which are more likely to bring "surprises" compared to the United States.

The bond market sends a strong signal

Although uncertainty still exists, the bond market is clearly transmitting expectations for future growth and inflation trends through the changes in the yield curves of two-year and 10-year treasury bond bonds in Germany and Germany.

Although the yield curves of the United States and Germany remain positive (i.e. long-term interest rates are higher than short-term interest rates), the significant flattening of the US yield curve in 2025 reflects a cooling of market expectations for growth. The yield curve in Germany has rapidly steepened, benefiting from increased military spending plans and expectations of lower energy prices, which are expected to boost European economic growth.

EUR/USD breaks through 1.0500

The differentiation of growth prospects is the main factor driving the trend of the euro/dollar this year, even overshadowing concerns about the escalation of global trade frictions. The growth advantage of the US economy is being challenged, and the decline in US bond yields has weakened its relative attractiveness, causing the downward trend of the euro/dollar to begin to reverse.

This week, the euro/dollar briefly fell below the 50 day moving average (50DMA), but quickly rebounded and rose sharply on Monday, supported by the narrowing of the US European interest rate differential.

Despite forming a bullish Morning Star (three candlesticks) pattern and receiving support from momentum indicators such as RSI (14) and MACD, the performance of EUR/USD above 1.0500 remains worrying. Since the beginning of this year, it has repeatedly failed to break through 1.0530, making it a key level that bulls must overcome.

Looking at the above, 1.0600 experienced intense trading at the end of last year. If it breaks through this level, it may test 1.0668 (June 2025 low) and the 200 day moving average (1.07268).

Looking at it below, 1.0450 is an important support level in the near future, and the 50 day moving average is a key downward indicator. If it falls below 1.0360, it may invalidate cautious bullish expectations.

Be alert to the impact of risk events

For euro/dollar traders, the market focus this week remains on US economic data.

Friday's non farm payroll report is the most important event, especially against the backdrop of declining consumer confidence. Although the market mainly focuses on employment growth data, the unemployment rate is the key indicator as it has a significant impact on the Federal Reserve's policies. If there is a discrepancy between non farm payroll data and unemployment rate, the market may be more inclined to interpret the unemployment rate data.

Prior to this, the ISM Service PMI is worth paying attention to. Previously, the manufacturing PMI hinted at the risk of stagflation in the economy. Therefore, if the service PMI also shows similar signs, market concerns about a sharp slowdown in the US economy may intensify.

The European Central Bank's policy guidance is crucial

On the European side, although there are several minor economic data releases, Thursday's European Central Bank (ECB) interest rate decision is the core focus of the market. At present, the market has fully digested the expectation of a 25 basis point interest rate cut, so the focus of trading will shift to the central bank's forward guidance and the latest economic forecast.

The market expects the European Central Bank to cut interest rates at least three more times this year, and there is even a risk of a fourth rate cut. However, recent economic developments indicate that if the European Central Bank intends to bring market surprises, it may adopt a more hawkish stance than market expectations.