While Europe is busy discussing peace talks regarding Ukraine, its economy is suffering from Donald Trump’s impending tariffs. This could force the ECB to cut rates aggressively and send the EURUSD pair down. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- There are many pitfalls in Ukraine peace talks.
- The ECB may resume rate cuts in March 2026.
- The Fed expects a repeat of the 2024 inflation scenario.
- Long trades on the EURUSD pair can be opened on a rebound from 1.044 or 1.042.
Weekly Euro Fundamental Forecast
The notion that the future of Europe can be determined without its direct involvement is as daunting as the looming threat of Donald Trump’s tariffs, which continue to weigh on the region. According to the EU, the White House’s decision to impose duties on the bloc is harming the EU economy. What further developments can be expected? The Bundesbank anticipates that US protectionism could reduce Germany’s GDP by 1.5 percentage points. This, in conjunction with the uncertainty surrounding the Ukraine peace talks, has prompted EURUSD bulls to retreat.
Germany’s GDP Growth
Source: Bloomberg.
The direct US-Russia negotiations have raised concerns in Europe, as there are rumors that Donald Trump will not allow Brussels to bargain on Ukraine’s future. Meanwhile, Washington has demanded security guarantees from the EU, prompting the bloc to make a significant decision to allow its countries to increase defense spending, despite the 3% budget deficit to GDP rule, by invoking the exemption clause. Previously, this exemption could only be applied in a severe economic crisis.
The military spending buildup is likely to have a positive effect on eurozone GDP, while the tariffs imposed by Donald Trump are likely to bear adverse consequences. The ECB will be called upon to support its economy, which, according to Bloomberg experts, will result in a third consecutive reduction in the deposit rate in 2025. The latest forecast is consistent with the previous one, with one notable exception: a slight majority is beginning to anticipate a resumption of the monetary expansion cycle in March 2026, which is unfavorable for the EURUSD pair.
ECB Rate Forecast
Source: Bloomberg.
Meanwhile, the Fed is not planning to resume monetary easing until disinflation returns. According to FOMC official Christopher Waller, this is the appropriate course of action. However, he anticipates a recurrence of history in 2024. Initially, CPI and PCE exhibited accelerated growth at the beginning of the year, but the indicators began to decelerate in the second quarter. As a result, the US regulator initiated a monetary expansion cycle in September.
However, the likelihood of a recurrence of last year’s events appears low. Tariffs and fiscal stimulus measures implemented by President Donald Trump are likely to spur inflation, and his intentions to mitigate this process by streamlining the government, reducing oil prices, and lowering Treasury yields appear to be more aspirational than realistic. A notable example of this is the Federal Court’s temporary suspension of the mass dismissals of officials from the Consumer Financial Protection Bureau.
Weekly EURUSD Trading Plan
As I mentioned in my previous article, the EURUSD pair will soon embark on a downward trajectory driven by the divergence in monetary policies and economic growth. The question on everyone’s mind is: when will this happen? At this point, it would be prudent to purchase the euro on a rebound from the support levels of 1.044 and 1.042 or sell it if the pair breaks through these key levels.
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.
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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