The Trump administration’s initiative to boost American prosperity is prompting price increases and challenging the Federal Reserve to address rising inflation. In this environment, the US dollar is gaining strength. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The US will impose 25% tariffs on steel and aluminum on March 4.
- Import duties have increased inflation expectations.
- The varying pace of monetary expansion supports the US dollar.
- Short trades can be opened if the EURUSD pair slides below 1.028.
Weekly US Dollar Fundamental Forecast
Markets are rising in anticipation of Donald Trump’s impending tariffs on steel and aluminum, which have led to a surge in prices of these and other commodities, reflecting investor concerns over potential supply shortages. The copper premium between US Comex Copper Futures and those traded on the London Metal Exchange has reached their highest levels since 2020, with futures up 2% in trading on February 10. This trend is also evident in other commodities, spurring inflation and forcing the Fed to take action to tame it. As a rule, the US dollar often emerges as the primary beneficiary in such a scenario.
Comex Over LME Copper Prices
Source: Financial Times.
The White House has dismissed the notion that tariffs are a pro-inflationary factor, asserting that sellers will be compelled to offer discounts, thereby minimizing the impact on consumer prices. However, the first trade war demonstrated that even American companies that profited from the levies on steel and aluminum began to raise prices. Subsequently, the Trump administration granted relief from the tariffs to several trading partners, including Mexico and Canada.
In contrast, Trump has not granted any exemptions, driven by an unwavering commitment to revitalize the US economy, even at the cost of other nations’ interests. Notably, the US president has inherited a robust economy from his predecessor, with GDP growth at 2.5% and unemployment at 4%. While inflation has fallen significantly from its peak in 2022, it remains well above the Fed’s 2% target. This suggests the likelihood of the Fed having to contend with rising inflation expectations, both among consumers and in the debt market, in the near future.
US Consumers’ Inflation Expectations
Source: Bloomberg.
This circumstance, in conjunction with American exceptionalism, will likely push the EURUSD pair lower, even in the event that the market becomes weary of tariffs, according to Manulife Investment Management. On the other hand, JP Morgan believes that the new duties will not boost the US dollar, as retaliatory tariffs are likely to follow.
In my opinion, the tariffs have not yet been fully priced in the quotes of the major currency pair. The imminent announcement of new reciprocal duties by President Trump is likely to heighten market uncertainty, thereby reinforcing the US dollar’s role as a safe-haven currency. In addition, the upcoming speech by Jerome Powell is expected to underscore the Fed’s resolute stance against inflation, which bodes well for those who anticipate a weakening of the euro against the US dollar.
Weekly EURUSD Trading Plan
The US Fed has gained time by taking aggressive action to launch monetary expansion in September, and it can now afford to wait until Donald Trump’s plans become clearer. At the same time, the different pace of monetary policy easing compared to the ECB instills confidence in the strength of the EURUSD pair’s bearish trend. As a result, a decline below 1.028 will allow traders to open more 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.
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.
