Markets exhibited an excessive degree of distrust in the US dollar, resulting in a widespread sell-off of US assets. As soon as the US administration eased its stance toward the Fed and China, EURUSD bears started to push the quotes lower. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Donald Trump is not going to fire Jerome Powell.
- US tariffs will be reduced.
- Europe and Japan will suffer more from trade wars.
- Long trades can be considered if the EURUSD pair rises above 1.1425.
Weekly US Dollar Fundamental Forecast
The US has come to the conclusion that its reaction to the decline in US stock indices was disproportionate, as evidenced by its imposition of tariffs and its public criticism of Jerome Powell. The firing of the latter would have been a self-defeating move for Donald Trump, as the loss of confidence in the Fed would have had disastrous consequences for the US dollar. Fortunately, the US President realized this in time, which led to a pullback in EURUSD quotes.
It is not within the scope of Donald Trump’s authority to dismiss Jerome Powell. However, he has expressed his desire for Powell to play a more active role in reducing the federal funds rate. The uncertainty surrounding the US Federal Reserve’s independence has been alleviated, enabling EURUSD bears to push the pair lower. The US dollar’s status as a major reserve currency is not likely to be affected by recent market fluctuations. Goldman Sachs believes that decades of American exceptionalism will not pass overnight, while Barclays notes that undoing a century of dollar dominance will take a considerable amount of time.
At the same time, markets may have overestimated the potential for the sale of American securities, which could lead to a pullback in the EURUSD pair. This is particularly relevant in the context of excessively extended speculative positioning in the greenback.
Speculative Positions on US Dollar
Source: Bloomberg.
According to Credit Agricole, the US is expected to reduce tariffs. This factor will likely de-escalate trade conflicts and support both the S&P 500 index and EURUSD bears. However, import duties will remain higher than they have been, which will have a greater impact on the export-oriented economies of the eurozone and Japan than on the US. Moreover, Donald Trump wants to avoid a confrontational approach with China as 145% levies are overly excessive; while tariffs may not reach that level, they will not be reduced to zero either.
US Dollar, Euro, and Yen Volatility
Source: Bloomberg.
Scott Bessent further contributed to the escalation of global risk appetite and the strengthening of the US dollar. During a private event, the US Treasury Secretary stated that he anticipated a de-escalation of the trade conflict with China.
The euro’s anticipated decline is a viable possibility. The currency is pro-cyclical, meaning it tends to lose value during periods of global economic downturn. In this regard, the IMF’s downward adjustment of global GDP forecasts from 3.3% to 2.8%, which is more pronounced than at the onset of the Russia–Ukraine conflict, is a clear bearish factor for the EURUSD pair. This is particularly notable given that the reputable organization does not anticipate a recession in the US economy.
Weekly EURUSD Trading Plan
Conversely, others have a different perspective. The Institute of International Finance projects a 0.8% contraction in US GDP in the third quarter and a 0.3% contraction in the fourth quarter. While the US may have the capacity to stabilize the markets, addressing the economic headwinds will require a more substantial effort. Its cooling economy will likely enable the EURUSD pair to resume its uptrend. Meanwhile, the risks of medium-term consolidation of the pair are increasing. Long trades can be opened above 1.1425.
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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