Friedrich Merz, the recently elected German leader, has made a strategic decision to reinforce the single currency, prompting a notable rally in the EURUSD pair. The question that arises is whether this momentum will endure or if the prevailing trade tensions will hinder bullish sentiment. Let’s discuss these topics and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Germany can afford $1.6 trillion in fiscal stimulus.
- German bond yields have seen their fastest rally since 1990.
- Banks are raising their GDP growth forecasts for Germany.
- Should the EURUSD pair fall below 1.0785, short trades can be considered.
Weekly Euro Fundamental Forecast
Investors had anticipated fiscal stimulus from Donald Trump, which would have strengthened American exceptionalism and brought the EURUSD rate to parity. Instead, German Chancellor-in-waiting Friedrich Merz announced fiscal stimulus measures, which led to the emergence of a new exceptionalism — German. This shift potentially signaled a reversal of the downtrend in the major currency pair.
The US decision to suspend military aid to Ukraine had a significant impact on Europe. The EU has come to recognize its own responsibility for its security, elected a new leader, and began to allocate more funds. Friedrich Merz, like former ECB head Mario Draghi in 2012, has promised to take every possible measure to support the country. His initial actions included creating a special fund for infrastructure development with $500 billion and lifting military spending from the fiscal brake established in 2009.
In anticipation of new large-scale issuances, German bond yields experienced their most significant daily rally since 1990, narrowing the gap with US Treasuries and propelling the EURUSD pair above 1.08, a level not seen since the US presidential election in November.
German 10-Year Bund Yield
Source: Bloomberg.
All joking apart, Germany has the financial capacity to allocate $1.6 trillion in fiscal stimulus to bring its current government debt level of 62% of GDP to the US level of 120%.
According to Morgan Stanley, total defense and infrastructure spending is projected to exceed €1 trillion. Furthermore, Bank of America anticipates that the annual growth rate of the German economy could increase from zero to 1.5–2% starting in 2027. Goldman Sachs has revised its German GDP forecast, raising it by 0.2% to 0.2% in 2025 and by 0.5% to 1.5% in 2026. The bank anticipates that the ECB will reduce interest rates not just once but twice this year.
In the foreign exchange market, speculation is mounting that the recent upward trend in the EURUSD exchange rate may not be a mere correction but rather a new trend. Weekly and monthly reversal risks for the euro have turned positive for the first time in six months.
Euro/Dollar Risk Reversal
Source: Bloomberg.
At the same time, traders are willing to pay more for downside protection hedges in the 3- and 6-month horizons, likely due to concerns over the potential for a large-scale trade war between the US and EU.
The recent rally in the EURUSD pair was driven by the ADP report, which indicated a modest increase of 77,000 jobs in the private sector in February. This figure is one of the weakest observed in the past two years, suggesting the likelihood of the Fed resuming its cycle of monetary expansion in the near future. This, in turn, will put more pressure on the US dollar.
Weekly EURUSD Trading Plan
Long trades opened at 1.042 have reached the target of 1.081 on the EURUSD pair, allowing traders to lock in profits partially. The pair’s trajectory will hinge on whether the 1.081 level is breached. At the same time, if the euro declines below 1.0785, one may consider short trades.
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.
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