The term “tariff” is frequently mentioned in Donald Trump’s speeches and US dollar-related discourse. After Trump used the term in his post on social media, EURUSD bulls were compelled to retreat. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The market overvalued the news of Trump’s choice of Treasury Secretary.
- The announcement of import duties helped the US dollar.
- The question of the Fed rate cut in December remains open.
- The EURUSD pair’s surge above 1.05 may lead to a pullback.
Weekly US Dollar Fundamental Forecast
The imposition of tariffs represents a clear negative factor for the currencies of the countries against which they are imposed. This has the effect of strengthening the US dollar. As anticipated, the EURUSD pair has experienced a correction following the announcement that Scott Bessent will assume the role of US Treasury Secretary. The rationale behind this is Donald Trump’s announcement of plans to impose 25% tariffs on imports from Mexico and Canada and 10% from China to curb illegal migration and drug trafficking.
Scott Bessent’s 3-3-3 plan resembles the economic strategy previously employed by former Japanese Prime Minister Shinzo Abe, known as the “Three Arrows.” The hedge fund manager has set a goal of reducing the budget deficit to 3% through accelerating GDP growth to 3% and increasing oil production by 3 million bps. The bond market responded favorably to these objectives, leading to a decline in US Treasury yields and a resurgence of bullish sentiment in the EURUSD pair.
In addition, the US dollar’s decline was influenced as some concerns surrounding the potential for trade wars eased. Scott Bessent has previously noted that the tariff option is always on the table but rarely exercised. Investors correctly assumed that the future Treasury Secretary was a proponent of negotiations rather than tariffs.
However, markets quickly realized that they had overestimated the impact of Donald Trump’s pick. The Republican is likely to limit the downside, as he demonstrated by announcing on social media imminent duties on imports from Mexico, Canada, and China.
US Imports
Source: Wall Street Journal.
Together, these two countries account for 42% of all shipments to the US. In particular, exports from Mexico City and Ottawa to the United States account for 80% of all such shipments. Imposing tariffs would have a detrimental impact on their economies. As anticipated, the Mexican peso and Canadian dollar both depreciated in response to Donald Trump’s announcements. The US dollar saw gains against major global currencies, with the exception of the Japanese yen.
Tariffs act as a catalyst for inflation. The prospect of a return to higher interest rates prompted Citi to urge the Fed not to reduce the federal funds rate in December. The derivatives market views a 50% likelihood of this outcome and anticipates a mere 38-basis-point decline in borrowing costs by May. In light of the ECB’s stated intention to ease monetary policy at nearly every meeting, this suggests that the EURUSD will likely decline.
Expectations on Fed Rate Cuts
Source: Bloomberg.
Weekly EURUSD Trading Plan
The market may be incorrect in its assessment. FOMC officials have indicated a willingness to continue the monetary expansion cycle in December, as Austan Goolsbee and Neel Kashkari have commented. The anticipated dovish minutes of the October meeting and the potential acceleration of European inflation create an opportunity for opening short-term long trades on the EURUSD pair on a breakout of the resistance level of 1.05. However, it is important to exercise caution and not get carried away. Traders should consider returning to short trades on the next suitable occasion.
Price chart of EURUSD in real time mode
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.
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