American exceptionalism, the Fed’s aggressive monetary tightening, and geopolitical developments are all lending support to the US dollar. Its dominance appears unshakable, but the primaries could test bulls’ confidence. Let’s examine the current landscape and develop a trading strategy for the EUR/USD.
The article covers the following subjects:
Major Takeaways
- France’s budget crisis is putting pressure on the euro.
- The US is seeking to bring oil prices down.
- An AI-related glitch could lend additional support to the US dollar.
- Short positions can be opened if the EUR/USD drops below $1.1185.
Weekly Fundamental Forecast for Dollar
What could stop EUR/USD bears? The pair continues to trade near 17-month lows. Weak economic activity in France, a deepening budget crisis, and uncertainty surrounding the presidential election are all weighing on the euro. Meanwhile, American exceptionalism, the Fed’s aggressive monetary tightening, and geopolitical tensions are boosting the US dollar. As a result, speculators are increasing their long positions in the greenback, while the US Dollar Index has closed higher for four consecutive weeks. So, what could derail the dollar rally and give EUR/USD bulls a reason to fight back?
Speculative Positions for US Dollar
Source: Bloomberg.
According to CIBC Capital Markets, the US dollar is likely to remain strong until oil prices decline. This suggests that the energy market may hold the key to the greenback’s vulnerabilities. Donald Trump’s push to lower energy prices ahead of the US midterm elections poses a potential risk to EUR/USD bears. The US administration’s pledge to refrain from bombing Iran until the primaries, along with a deal to supply Russian diesel fuel to global markets, could help ease energy prices. But will these efforts succeed?
Despite the stalemate in the Middle East, experts cited by The Wall Street Journal expect oil prices to fall, helping US inflation slow from 3.5% at the end of 2026 to 2.6% by the end of 2027. Such a decline in inflation could pave the way for the Fed to begin easing monetary policy next year. Bloomberg Economics expects the federal funds rate to fall to 3.75%. This scenario could reverse the US Dollar Index’s upward trend. However, one major complication remains: France’s political and fiscal outlook is uncertain.
Market Expectations for Fed Funds Rate
Source: Bloomberg.
The concern is less about the risk of a French default or the country leaving the EU. Political uncertainty is weighing on economic activity across the eurozone, triggering a domino effect that could further undermine the region’s economic outlook. The eurozone economy is also less resilient to high interest rates than its US counterpart. Bloomberg Economics, for instance, forecasts a 50-basis-point cut in the ECB’s deposit rate in 2027.
Meanwhile, the US dollar could gain another key advantage. According to Deutsche Bank, the biggest systemic risk in 2027 may not come from France, but from a potential breakdown in the artificial intelligence ecosystem. Security breaches, a failed IPO, or tech companies’ inability to justify their massive investments could trigger a reassessment of the sector’s prospects. To deliver on current expectations, AI companies may need to generate around $3.5 trillion in profits. If those expectations fall short, the S&P 500 bubble could burst. A resulting flight to safety would likely boost demand for the US dollar, allowing the greenback to shine once again.
Weekly Trading Plan for EUR/USD
Therefore, the EUR/USD pair could rebound in the short term, but the broader downtrend remains intact. This creates an opportunity to sell the euro on upswings or enter short positions if the pair breaks through $1.1185.
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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