EUR/USD Weekly Outlook, May 5, 2025: Recession Hits U.S. as Euro Finds Breathing Room

• The latest U.S. macroeconomic data confirms what many had feared: the country has entered a recessionary quarter. GDP contraction coupled with a rise in inflation spells trouble—not just for the broader economy, but also for the Federal Reserve. Meanwhile, Donald Trump remains upbeat, hinting at imminent trade agreements with several major economies.
• In Europe, inflation remains subdued, giving the European Central Bank room to continue cutting interest rates in an effort to rekindle growth.
• The EUR/USD appears to be consolidating gains just below the resistance range of 1.14–1.15, signaling a potential easing in selling pressure on the dollar.

Trump Calms Markets, But Data Confirms U.S. Slump

Following meetings with European leaders during Pope Francis’s funeral, markets appear reassured by Trump’s more conciliatory tone on tariffs—marking a sharp contrast to his inflammatory remarks in early April that had rattled investors. At least rhetorically, Washington is signaling improved ties with the EU, Japan, India, and even China.

Financial markets have responded positively: equities are recovering, yields have edged lower, and the dollar has stabilized after weeks of losses. But underneath the surface, the U.S. economy is faltering. A sharp increase in imports—spurred by companies stockpiling ahead of the new tariffs—has pushed the trade deficit higher. Imports surged 41%, the steepest jump since the COVID-era supply rush.

U.S. GDP fell by 0.3% in Q1 2025, far below expectations of a 0.4% increase. More concerning to analysts, however, was the spike in inflation, which accelerated from 2.6% to 3.5%, overshooting forecasts of 3.1%. Consumer spending growth slowed to 1.8%, less than half the pace of the previous quarter. The only bright spot: the labor market remains stable, with no signs of major weakness for now.

Predictably, Trump has lashed out at Fed Chair Jerome Powell, blaming monetary policy for stifling growth. But the central bank faces a stagflationary bind that calls for caution before easing rates. Despite the political pressure, the Fed is unlikely to pivot quickly.

Trump, for his part, has told markets that trade deals with India, Japan, and South Korea are close, and even suggested that China is warming to a fair agreement. While Beijing’s response has so far been tepid, investors will be watching closely in the coming weeks to see if this rhetoric translates into policy.

Meanwhile, the eurozone continues to grapple with sluggish growth and stubbornly low inflation—conditions that strengthen the ECB’s hand as it pursues further rate cuts. First-quarter GDP data surprised to the upside at +0.4%, which should not materially shift the current trajectory, especially with the euro trading far from problematic levels.

Technical Analysis: EUR/USD Nears Reversal Zone

The EUR/USD rally appears to be a corrective bounce within a broader, long-term dollar-favoring trend. Historically, a 4% deviation above the 200-day moving average has marked a critical threshold for identifying cyclical peaks in the pair—and that condition has now been met.

Unless the pair can break convincingly through the 1.14–1.15 resistance range, the long-term bearish structure for the euro remains intact. A failure here could lead to renewed dollar strength, driven by profit-taking and technical resistance.

What looked like a straightforward cyclical bottom just days ago is evolving into something more complex. Every 34 months, the EUR/USD tends to hit a significant high or low, and the next window falls in late July. Based on current technical positioning, the pair appears more likely to form a cyclical top than a bottom in that period.

The upper boundary of the long-term descending channel is now in sight, offering a potentially strategic dollar-buying opportunity should the euro rally into that zone. The scenario is not yet confirmed—but it is certainly worth watching.