EUR/USD forecast shifts as traders eye a weaker dollar

The euro just made a bold move as EUR/USD surged over 2.5% on Thursday, breaking past the 1.1200 mark and closing at its highest level in nearly two years. For traders watching this pair stagnate for months, it was the breakout they’d been waiting for.

But now that the euro is climbing, the real question is: Where does the dollar go from here?

Inflation cools, tariff tensions ease, dollar takes the hit 

Two key catalysts lit the fuse under EUR/USD. First, the Trump administration backed away from its latest tariff threats, calming nerves across risk markets. It’s a playbook we’ve seen: throw out significant trade threats, watch markets tremble, and then dial it back just enough to stabilize sentiment. But this time, the dollar was especially vulnerable.

That’s because March inflation data delivered a shocker. Core CPI fell to 2.8% year-over-year, the lowest since 2020, after sticking above 3% for nearly eight months. Headline inflation dropped to 2.4%, adding fuel to the fire. For investors and the Fed, it was the first real sign that inflation might be cooling meaningfully.

The result? A broad pullback in dollar demand and a wave of strength for euro and pound bulls.

All eyes on consumer sentiment and inflation expectations

But before we get too carried away, there’s still one big test coming: Friday’s University of Michigan Consumer Sentiment Index. Expectations are grim. The index is forecast to fall to 54.5, a nearly three-year low. 

Consumers feel the weight of policy uncertainty, even with inflation easing on paper.

Consumer inflation expectations, which remain sticky, will be even more critical. Last month, Americans expected 5% inflation over the next year and 4.1% over five years, above what the Fed wants. If those expectations don’t budge, the Fed might stay hawkish longer than markets hope.

So, where does the Euro dollar exchange rate go from here?

According to analysts, the dollar's weakness could deepen if sentiment rebounds and inflation expectations fall. That opens the door for continued gains in EUR/USD and GBP/USD. But if Friday’s data suggests the public still expects stubborn inflation, if risk sentiment takes another dive, the greenback could fight back hard.

Dollar technical analysis: Will the USD fall further?

At the time of writing, buy pressure is dominant on the daily chart as prices stay above the moving average. However, prices slightly breaching the upper Bollinger band is an indicator of overbought conditions. RSI deep in overbought territory adds to the narrative. 

Key levels to watch should the dollar strengthen are $1.0949 and $1.0798. Should the dollar weaken further, a likely target would be the $1.3190 price level.

You can speculate on dollar strength by trading dollar currency pairs with a Deriv MT5 or Deriv X account.