European Markets Rally on Trade Optimism, but Growth Concerns Linger

 Key Takeaways:

*The euro appreciates while the European equity market gains on trade optimism.  

*Stable eurozone economic indicators, including inflation data, may help the euro replace the U.S. dollar as the global trade currency. 

European equity markets closed higher on May 26, 2025, propelled by optimism surrounding improved Euro-U.S. trade relations. The announcement of a temporary suspension of tariffs until July alleviated concerns over escalating trade disputes, fostering a risk-on sentiment across Eurozone indices. Consequently, the euro appreciated significantly, reaching its highest level in May against the U.S. dollar, underpinned by reduced trade tensions and a favorable market outlook.

Stable inflation metrics in the Eurozone further bolstered confidence, aligning with the European Central Bank’s (ECB) current monetary policy stance. ECB President Christine Lagarde highlighted the euro’s potential to serve as a credible alternative to the U.S. dollar in global trade, citing the region’s resilient economic fundamentals and the currency’s strengthened position. This statement reinforced market expectations of the euro’s growing prominence in international transactions.

Despite these positive developments, downside risks emerged from disappointing preliminary Purchasing Managers’ Index (PMI) data for May. The weaker-than-anticipated readings signaled potential slowdowns in manufacturing and services sectors, raising concerns about the Eurozone’s economic growth momentum. These lackluster indicators could challenge the region’s recovery trajectory and may exert downward pressure on the euro against its G7 counterparts in the near term, particularly if growth forecasts are revised lower.

Technical Analysis

EUR/USD, H4

The EUR/USD pair remains resilient, consolidating near recent highs despite experiencing a minor technical retracement in the previous session. Price action continues to respect the broader uptrend, with key focus now on the 1.1365 pivotal support level. A successful defense of this level would reinforce the pair’s bullish trajectory, suggesting sustained upward momentum.

Momentum indicators are reinforcing this bullish bias: the Relative Strength Index (RSI) is approaching the overbought threshold, signaling strong buying interest, while the MACD continues to advance, reflecting solid and strengthening bullish momentum. If buyers maintain control above 1.1365, the pair could be poised for further upside, in line with the prevailing trend.

Resistance levels: 1.1467, 1.1625

Support levels: 1.1340, 1.1200