The market interpreted tariffs as a mere pretext for negotiation. When the White House refuted this assertion, the EURUSD pair collapsed. This occurred in the context of a US stock market rout and expectations of ECB rate cuts. Let’s discuss these topics and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Treasury Secretary Scott Bessent wants to start with 2.5% tariffs.
- Donald Trump has set more ambitious goals.
- The fall in US stock indices has dragged the euro down.
- The EURUSD pair’s trajectory depends on a test of support at 1.0405–1.0415.
Weekly US Dollar Fundamental Forecast
At the beginning of the year, the US dollar initially declined due to the Washington Post’s exclusive report on the phased implementation of tariffs, followed by a subsequent rise after President Trump’s refusal. This led investors to anticipate significant market turbulence on inauguration day. However, by the end of January, they perceived the duties as a mere negotiating tactic. In reality, no concrete actions were planned. Notably, a Financial Times article outlines that Scott Bessent advocates for universal tariffs starting at 2.5%, with subsequent increases. Against this backdrop, the EURUSD pair exhibited a nosedive.
President Trump further fueled the debate by indicating that 2.5% was not sufficient and that he sought a more substantial increase. He stated that as import duties rise, taxes on Americans will decrease, leading to a significant return of jobs and factories to the US. “We’re going to protect our people and our businesses, and we’re going to protect our country, with tariffs,” Trump said.
The resurgence of protectionist rhetoric has reignited interest in the US dollar as a safe-haven asset, particularly in light of the US stock market downturn following reports that NVIDIA has a formidable competitor in China. DeepSeek asserts that it spent a mere $5.6 million to achieve what the world’s largest company required $100 million to accomplish.
S&P 500 and EURUSD Performance
Source: Trading Economics.
As a result, NVIDIA shares saw a 17% decline, representing the most significant drop since March 2020. The total daily loss in market cap was estimated at $592.7 billion, the most substantial loss for both the chip maker and the entire US market in history. This decline immediately impacted stock indices, causing a corresponding drop in EURUSD quotes.
In the current market environment, investors must consider two primary factors: the strength and volatility of the US dollar. These factors are interconnected, amplifying their respective impacts.
The euro has shown sporadic signs of resilience following the surprising surge in January’s PMIs. However, this might be attributable to an increase in front-loading of US exports, anticipating the imminent imposition of tariffs. According to Bloomberg’s expert forecasts, the eurozone GDP decelerated to 0.1% in the fourth quarter.
Euro Area GDP Growth
Source: Bloomberg.
According to Christine Lagarde, the ECB is undeterred by the surge in inflation in the US and is taking independent action. Goldman Sachs notes that the European Central Bank perceives the risks to the eurozone to be unrelated to high prices but rather to sluggish GDP growth. The regulator is capable and should be willing to cut rates further. In light of the Fed’s decision to maintain its pause, this stance reinforces the ongoing downtrend in the EURUSD pair.
Weekly EURUSD Trading Plan
The major currency pair has almost touched the key resistance level of 1.054. Meanwhile, the decline of the euro below 1.047 allowed traders to initiate short positions. If EURUSD quotes breach the support area of 1.0405–1.0415, one may consider short trades. Otherwise, short-term long trades can be opened on a rebound.
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.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
