As soon as the US administration attempted to de-escalate the trade conflict with China, TACO trading returned to the markets. However, Trump still refrains from canceling the 100% tariffs before the negotiations with Beijing. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The US and China are in a state of trade war.
- The US economy is full of contradictions.
- The French political drama has come to an end.
- Long positions on the EURUSD pair can be opened with the target of 1.182.
Weekly US Dollar Fundamental Forecast
Slow and steady wins the race. Investors moved too quickly from “selling America” to the TACO trade. While Scott Bessent’s words about a longer truce with China boosted stock indices, Donald Trump’s confirmation of a 100% tariff would certainly have pushed the S&P 500 index down if the speech had not taken place after the close of trading. The president continues to be gentle with the stock market, but it is not helping.
No matter how hard the US administration tries to de-escalate the conflict, trade uncertainty will remain until negotiations take place. It does not bode well for the US economy. Neither does the shutdown. According to Scott Bessent’s estimates, each day of the US government shutdown costs the US $15 billion. Fears of a slowdown in GDP have pushed 10-year Treasury bond yields to their lowest levels since April, and the US dollar has fallen along with it.
10-Year Treasury Yield
Source: Wall Street Journal.
According to FOMC member Christopher Waller, sooner or later, something will change in the current conundrum of rapid economic growth and stagnant employment. Either the gross domestic product will slow down or the labor market will recover. At the same time, the lack of data due to the shutdown is forcing the Fed to move cautiously after lowering the federal funds rate in October.
The question of easing monetary policy at the next FOMC meeting seems to have been resolved. The Fed will depend on the data, which is not available now. All that remains is to speculate. The trade war and shutdown support Christopher Waller’s first scenario: GDP growth is more likely to slow than the labor market to recover.
Thus, the US is under pressure due to the escalation of the trade conflict with China and the government shutdown. The derivatives market is confident that the Fed will cut rates in October and December. The ECB, on the other hand, is hinting on the sidelines of the IMF meeting that its monetary policy is in a comfortable position, especially since the clouds over France are beginning to dissipate.
Sébastien Lecornu has managed to survive two votes of no confidence, first from the left, then from the right. Thanks to the postponement of pension reform and the support of the Socialists, the prime minister remained in office. The government can now discuss the draft budget. Indeed, France’s credit rating downgrade in October or November could trigger a sell-off in government bonds, but investors believe the worst has passed. This is excellent news for the EURUSD pair.
France’s Credit Ratings
Source: Bloomberg.
Weekly EURUSD Trading Plan
Trade and political uncertainty continue to weigh heavily on the US dollar. The euro, on the other hand, has shrugged off pressure. The first of the previously set targets for long trades on the EURUSD pair at 1.174 is within reach. The second target is 1.182. The recommendation is to maintain and increase purchases.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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