The US president has decided to reshape international trade. Trump’s policies are based on domination, not on cooperation. Canada has already retaliated; now it is the turn of China and Mexico. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The US has imposed tariffs against Mexico, Canada, and China.
- Ottawa retaliates with duties on imports.
- The US dollar is surging amid trade wars.
- The EURUSD pair may fall to parity.
Weekly US Dollar Fundamental Forecast
It would be unwise to underestimate the impact of President Trump’s trade policies. Market expectations that the White House would impose tariffs gradually or impose a grace period were confounded when the 25% tariffs on imports from Mexico and Canada and the 10% tariffs on imports from China took effect on February 1. This led to a significant decline in the EURUSD exchange rate, notching its worst weekly performance since November.
According to Eurizon SLJ Capital, trade tensions could intensify in the near term as other countries are politically compelled to retaliate or adopt similar policies. This scenario should bolster the US dollar and elevate US Treasury yields.
In response, Canada has swiftly imposed retaliatory duties on CA$155 billion worth of imports, equivalent to $107 billion. Mexico and China have also expressed intentions to impose retaliatory measures, and the EU has issued a warning that it will respond strongly if Trump’s threats against the currency bloc are implemented.
US Imports by Country
Source: Financial Times.
A global trade war has become a reality, and the winner will be the one who manages to inflict and endure the most pain. Donald Trump’s strategy to make America great again by weakening other nations is not based on cooperation. The new US policy is focused on dominance.
The scale of the second trade war is unambiguously larger than during the first Republican presidential term when tariffs were imposed on two-thirds of China’s $370 billion worth of imports. Currently, the focus has shifted to the entire $410 billion worth of shipments, and when Mexico’s $466.6 billion and Canada’s $377.2 billion are included, the total impact is substantial.
Tariffs and retaliatory measures from other countries could potentially accelerate US inflation, which continues to be a concern. In December, the core personal consumption expenditure index rose by 2.8% for the third consecutive month. This indicates a stabilizing trend, and the Petterson Institute for International Economics forecasts that a trade war could lead to a 0.54% increase in price growth. As a result, US inflation is expected to surge, resulting in higher US Treasury yields and the strengthening of the US dollar.
EURUSD Quotes and US-Germany Bond Yield Spread
Source: Bloomberg.
In Europe, the economic outlook is quite different. German CPI inflation unexpectedly slowed from 2.6% to 2.3% in January, which lowered German debt rates and exerted downward pressure on the EURUSD pair. The derivatives market indicates that the European Central Bank will likely implement three acts of monetary expansion before the end of 2025, with a 20% probability of a fourth. The cycle may accelerate if the US imposes tariffs on the EU.
Weekly EURUSD Trading Plan
Against the backdrop of Donald Trump’s protectionist policies, the EURUSD pair will likely slide to parity in the near term, allowing traders to keep their short trades formed at 1.047 and 1.0415 open and initiate more short positions on pullbacks.
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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