At the beginning of 2025, it seemed that the United States’ aggressive protectionism would support EURUSD bears. However, the situation underwent a significant shift with the arrival of spring. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Tariffs against Mexico and Canada failed to strengthen the US dollar.
- Investors fear a recession in the US economy.
- Fiscal stimulus will accelerate German and Eurozone GDP.
- The EURUSD pair may surge to 1.071 and 1.081.
Weekly US Dollar Fundamental Forecast
The recent decline in the value of the US dollar raises questions about the role of tariffs in the market. The potential for last-minute cancellations or delays in the implementation of tariffs is a key factor in the market’s perception of these policies. Media reports citing Commerce Secretary Howard Lutnick suggest that the US President is seeking a resolution with Canada and Mexico, emphasizing that this will not be a temporary halt but a long-term agreement. However, the rally in the EURUSD pair is driven by the fact that bears have lost their primary advantage: American exceptionalism.
At the beginning of 2025, the forex market was guided by a clear narrative: tariffs would impede the already fragile European economy, prompting the ECB to intervene with aggressive rate cuts, leading to a surge in European bond yields. Conversely, the yields of US bonds will rise due to accelerated import duties, leading the Fed to maintain or even raise rates. This divergence in monetary policy would push the EURUSD pair to parity.
Contrary to this prediction, European bonds are declining, and Treasury yields are increasing due to the most significant German-EU fiscal shift since German economic unification. US Treasuries are rising due to fears of stagflation and a recession in the US, leading to falling rates, narrowing yield differentials, and a rally in the EURUSD.
US Treasury and Euro Aggregate Bond Indexes
Source: Bloomberg.
According to estimates by Budget Labs, the tariffs already imposed by the White House will subtract 0.6% from US GDP in 2025. Meanwhile, Evercore ISI and Citigroup project a figure of 1%, with the latter firm arguing that a cooling economy will force the Fed to end its pause in the monetary expansion cycle sooner. Citigroup believes the odds of a federal funds rate cut in May are even.
The dramatic shifts in financial markets can be attributed to the underestimation of the European economy, which, due to the surge in defense spending by €800 billion, is poised to accelerate. In addition, there is an overestimation of expectations regarding US GDP growth. The US dollar’s traditional advantage, rooted in American exceptionalism, has been weakened. Despite the fact that the greenback is a global reserve currency, investors are seeking alternative options, such as the Japanese yen and the Swiss franc, due to their status as safe-haven assets.
As a result, major financial institutions like Goldman Sachs, MUFG, and TD are no longer forecasting parity in the EURUSD rate, with Deutsche Bank anticipating a significant surge to 1.1 by the end of 2025.
Weekly EURUSD Trading Plan
It seems that euro bulls are overestimating their power. The ongoing armed conflict in Ukraine and the US-EU trade war exert pressure on EURUSD quotes. The pair’s rally, fueled by external factors, may extend towards 1.071 and 1.081. In this regard, long positions established at 1.042 should be kept open. However, as external forces gradually diminish, the pair will likely rebound from key resistance levels, prompting traders to open short positions.
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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