Currency wars will follow the trade wars pledged by Donald Trump. Competitive devaluation will mitigate the effects of US import duties. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- Donald Trump will start with tariffs, not fiscal stimulus.
- The yuan sagged by 7% in 2018-2019 due to trade wars.
- Europe looks vulnerable to US protectionism.
- The EURUSD pair may slump toward parity.
Quarterly US dollar fundamental forecast
The US dollar is unique in the global financial landscape, offering a combination of attributes that sets it apart from other currencies. The US economy is experiencing robust growth, US stock indices are rallying, US Treasury bond yields are high, and the US currency boasts a safe-haven status. It is unsurprising that the number of investors adopting a buy or lose strategy, also known as FOMO, is increasing not only in the crypto and equity markets but also on Forex. The US dollar is experiencing a surge in demand, dragging the EURUSD pair to its lowest level since April. Notably, this is just the beginning.
While Donald Trump’s policy directions are a significant factor for the market, the sequence in which he implements them also matters. The current narrative suggests that fiscal stimulus will accelerate US GDP and inflation, forcing the Fed to pause its monetary expansion cycle. This will lead to higher Treasury yields and a stronger US dollar.
USD Index and US Treasury yield
Source: Nordea.
However, fiscal stimulus will take plenty of time to be implemented. The proposals must first be approved by Congress and then have an effect on the economy. Most likely, Donald Trump will focus on trade tariffs at first. Such policies represent a move towards a more protectionist global economic model, with the US becoming the primary driver of growth. The outcome is a robust US dollar, but its appreciation puts a damper on prices domestically. In other words, the Fed can maintain its current interest rate policy while the US dollar’s dominance will rest on currency wars.
Following the imposition of a 25% tariff on half of Chinese imports by the US in 2018, the yuan initially declined by 5% and subsequently lost a further 2% of its value the following year. To offset the impact of the trade war, Beijing has deliberately devalued its currency. Other countries against which Donald Trump has promised to impose 10-20% duties may take similar action.
Europe is particularly vulnerable in this context. The pandemic and the armed conflict in Ukraine have redirected trade activity from Russia and China to the United States. The eurozone has a significant trade surplus with the US. In light of this, access to US markets holds greater significance for Germany and its neighbors than American access to European markets. If this is the case, Donald Trump can dictate the terms of any potential agreement.
Therefore, EURUSD bulls are fleeing the market. The already sluggish economic growth in the currency bloc could be undermined by de-globalization, forcing the ECB to cut rates and engage in competitive euro devaluation. Trade wars would quickly escalate into currency wars, creating roadblocks for those choosing the euro as a primary trading instrument.
Quarterly EURUSD trading plan
To achieve favorable trading results, it is recommended to adopt Warren Buffett’s “buy and never sell” streategy. The golden opportunity is imminent for those who initiated short positions on the EURUSD pair at 1.12 and opened more short trades at 1.0905. The price is approaching parity. The key is to maintain patience.
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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