Europe is on the verge of a debt crisis. Investors are seeking reliable investment destinations for their assets, turning their attention to the US dollar. Moreover, in light of the recent decisions by the judges, it is clear that the United States continues to uphold democratic principles. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The US dollar is regaining investor confidence.
- Europe is on the brink of a new debt crisis.
- The outflow of capital from Europe to the US is dragging down the euro.
- Long positions on the EURUSD pair can be opened above 1.165.
Weekly US Dollar Fundamental Forecast
The decline of the USD index in 2025 can be attributed to the loss of American exceptionalism. Sweeping tariffs and fiscal dominance have resulted in a concentration of power in the hands of Donald Trump. The Federal Court of Appeals’ ruling that import duties were illegal led to significant shifts worldwide. The decision has confirmed that the United States continues to uphold democratic principles. As a result, the US dollar is showing signs of stability and recovery.
The US dollar has once again become a popular safe-haven asset, driven by high demand during a period of global debt market turbulence, which has pushed the EURUSD pair down. Due to Trump’s policies, financial markets have begun to regard German bonds as a viable alternative to US Treasuries. However, the fiscal problems that have emerged in Europe have led to a flight of investors.
Prime Minister François Bayrou’s intention to reduce the budget deficit to bring it closer to the EU’s required 3% of GDP was perceived as an act of self-sacrifice. In the realm of politics, it is often prudent to cease further action once a problem has been exposed. Markets are uncertain about Rachel Reeves’ ability to address the £35 billion budget deficit. Her fiscal austerity policy is leading to a sell-off of British bonds.
France-Germany Bond Yield Spread
Source: Bloomberg.
The issue is further compounded by the acceleration of European inflation to 2.1% in August. This development marks the conclusion of the ECB’s cycle of monetary expansion and leads to an increase in European bond yields. The yields on French bonds have reached their highest levels since 2009, and on German bonds since 2011.
Euro Area Inflation
Source: Bloomberg.
The debt markets are unstable, prompting investors to revert to the US dollar, especially in light of the Federal Appeals Court’s recent ruling, which indicated that the US administration does not hold exclusive authority over the nation. The US government will appeal to the Supreme Court to overturn the lower court’s decision. The claim is that declaring the tariffs illegal would have disastrous consequences for the US.
In fact, Donald Trump will have to find another reason to impose import duties quickly. The turmoil in global trade, against the backdrop of a resurgent US dollar, is driving the decline of the EURUSD pair.
Weekly EURUSD Trading Plan
The US dollar has also been bolstered by inflated expectations of monetary expansion by the Fed. Markets anticipate the cycle’s resumption in September and foresee a 100 basis point decline in the federal funds rate over 12 months. If the August employment report turns out to be strong, these forecasts will likely change. Therefore, it would be better to reduce short trades on the US dollar in anticipation of this significant event. A conservative strategy implies refraining from entering the market, while an aggressive one entails the purchase of the EURUSD pair if it exceeds 1.165.
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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