Markets often get ahead of themselves. According to the outgoing Vice President of the European Central Bank, Luis de Guindos, investors are underestimating the risks of economic growth slowdown due to geopolitical, fiscal, and macro-financial events. If this is the case, expectations for the 2nd and 3rd acts of monetary tightening by the ECB are clearly overblown. A reassessment of market views will restrain the advance of EUR/USD, but it will not prevent it.

Friedrich Merz's Council of Economic Experts has lowered Germany's 2026 GDP forecast by nearly half, from 0.9% to 0.5%, aligning with government estimates. Inflation is expected to rise to 3%. There is a clear stagflationary backdrop, which will create a rift within the Governing Council. "Hawks" will insist on raising deposit rates to combat high prices, while "doves" will express concerns about the slowing economy.

Dynamics and Forecasts for Germany's GDP

Amid this backdrop, to expect the ECB to implement 2-3 acts of monetary tightening this year is highly overconfident. However, the ECB will indeed raise rates at least once. Most likely in June, which provides support for EUR/USD.

This is also true for the proximity of European stock indices to record highs. Unlike their American counterparts, the Euro Stoxx 600 has not yet returned to pre-war levels. Companies in the EU have delivered an impressive earnings season, but it is too early for them to compete with AI technologies. Concerns about an AI bubble in the U.S. may lead investors to seek alternatives. Europe has something to offer in this regard. Capital inflows could become a driver of the EUR/USD rally.

Dynamics of EuroStoxx 600

The rise in global risk appetite, as reflected in the willingness of American and European stock indices to set new record highs, is bad news for the U.S. dollar—not only because of its status as a safe-haven asset.

According to MillTech, in the first quarter, investors from the U.S. and the UK increased their currency hedging ratios from 49% to 57%. This refers to selling the greenback to hedge risks in investments in American securities. The higher the S&P 500 climbs, the worse it will be for the USD index.

Given this context, the weakness of the German and Eurozone economies no longer scares bulls in EUR/USD. They are betting on improved global risk appetite, a rally in European stock indices, and greater scale in currency risk hedging through dollar sales. In this situation, the euro has solid arguments for breaking its negative trend against the U.S. dollar.

Technically, a trading corridor of short-term consolidation is forming on the daily chart for EUR/USD within the range of 1.1615–1.1655, near the lower boundary of the fair-value range of 1.1630–1.1785. This allows for placing limit orders to buy euros at $1.1655 and sell at $1.1615.