Germany’s recent decision to amend the constitution to loosen the debt brake could potentially trigger a significant rally in the EURUSD pair. However, a looming large-scale trade war between the US and the EU may significantly harm the euro. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Germany prepares for a vote on the fiscal brake.
- Trade wars will slow the global economy.
- The EU may impose tariffs on imported services.
- The 1.091 level remains the line on the sand for the EURUSD pair.
Weekly Euro Fundamental Forecast
Investors continue to buy the euro ahead of the upcoming vote in the Bundestag to amend the constitutional rule of the fiscal brake and ongoing signals of a slowdown in the US economy. However, the potential for a large-scale trade war between the United States and the European Union poses a significant threat to the EURUSD rate, which could lead to a rapid and substantial decline in the major currency pair.
Chancellor-in-waiting Friedrich Merz expresses confidence in the positive outcome of the vote on the issue that could change the fate of Europe. Germany’s shift from fiscal restraint to profligacy will accelerate eurozone GDP, boost German bond yields, and strengthen the single currency. The Christian Democratic Union, Social Democrats, and Greens collectively hold 520 seats in the lower house of parliament, a figure 31 seats higher than the threshold required to amend the country’s constitution.
Fiscal stimulus can offset the negative effects of trade wars. According to the OECD, reciprocal tariffs are predicted to subtract 0.3% from German GDP in 2025 and 0.1% in 2026. For the US, the figures are projected to be 0.2% and 0.5%, respectively. Notably, the estimate does not include the projects of Friedrich Merz.
OECD Forecasts for World’s Leading Economies
Source: Bloomberg.
On paper, the EU is expected to lose a trade war before it even begins. The EU has a $235.6 billion trade surplus in goods with the United States, so a “tit-for-tat” response would hurt the currency bloc. The EU will likely be exhausted quickly, as was the case with the US-China trade war during Donald Trump’s first term.
However, if the trade in goods between the United States and the European Union is estimated at $1.3 trillion, and the trade in services is estimated at $750 billion, the US already has a deficit in this sector. There is a high risk that Brussels will start imposing duties on imported services. The potential for a trade war between the two regions could have far-reaching consequences, potentially affecting other aspects of the relationship. Sales of companies that have invested across the Atlantic are estimated at $7.5 trillion.
US and European Foreign Trade and Investment
Source: Wall Street Journal.
As a result, the total scope of a trade war between the US and Europe might surpass $9 trillion, which could be a disaster for the global economy. The greenback, often seen as a safe-haven currency, is likely to benefit from the trade war. In a pessimistic scenario, global inflation risks will accelerate. The OECD has revised its forecast for the US CPI, raising it by 0.7% in 2025 to 2.8% and by 0.6% in 2026 to 2.6%. The organization anticipates that the Fed’s cycle of monetary expansion has reached its conclusion despite having previously forecast the federal funds rate decrease from 4.5% to 3.5%.
Weekly EURUSD Trading Plan
Long trades can be opened if the EURUSD pair breaks through the key level of 1.091. However, if the major currency pair’s rally is followed by a pullback with a drop below the key level, short trades can be considered.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. 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 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
{{value}} ( {{count}} {{title}} )
This post is originally published on LITEFINANCE.
