The strategy employed by Donald Trump to address the US trade deficit through tariffs may have unintended consequences, including potential shortages and stagflation. What are the implications of this for the US dollar? Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The US threatens to raise tariffs on copper imports to 50%.
- The US administration’s policy could lead to stagflation in the US.
- Donald Trump continues to call on the Fed to cut rates.
- Short trades on the EURUSD pair can be considered in the short term if the price plunges below 1.168.
Weekly US Dollar Fundamental Forecast
It is evident that the implementation of 50% tariffs on copper imports, as proposed by Donald Trump, will have a detrimental impact on the US economy. The same holds true for other commodities and goods. On paper, everything appears to be in order, but the decline in the USD index in response to the escalation of trade conflicts indicates otherwise. However, the market anticipates a shift in the US administration’s stance, allowing EURUSD bears to drag the pair down.
American companies import approximately 50% of the copper they use. Donald Trump’s threats to impose tariffs of 25% and then 50% led to a record rise in prices. Furthermore, concerns that the tariffs would be implemented contributed to proactive purchases over an extended period.
As a result, New York copper contracts have soared by 25%, trading at a substantial premium to London futures. Copper prices in the US are high, and the rise in purchase costs increases the risk of inflation. The introduction of 50% tariffs could potentially exacerbate this issue by redirecting the metal from the United States to China.
US Average Tariff Rate
Source: Bloomberg.
Copper serves as a prime example of how the market functions. According to Deutsche Bank, the import duties announced in early July will increase the average US tariff by 18.7%. This figure is notably lower than the 22% observed on the Liberation Day in the US, yet it remains significantly high. These figures represent the highest rates observed since the early 20th century. There is a significant risk that, in addition to the redirection of imports, goods produced in the United States will no longer be purchased. Germany has already implemented this strategy. In May, German exports decreased by a modest 1.4%, while imports experienced a 3.8% decline, including a notable 10% drop from the US.
High inflation and slowing economic growth created a stagflation scenario, causing the USD index to lose more than 10% in the first half of the year. The US economy is showing signs of instability, but as long as inflation, prices, and expectations remain stable, Donald Trump will continue to urge the US Federal Reserve to cut interest rates.
US Inflation Expectations
Source: Bloomberg.
According to the US president, Jerome Powell should resign immediately if he misled Congress about the renovation of the US central bank’s headquarters. Donald Trump stated that the Fed chairman had persistently expressed concern over inflation that was not substantiated. He declined to act in the appropriate manner, and the present moment is optimal for reducing interest rates.
Weekly EURUSD Trading Plan
Concerns about stagflation and the potential for the Fed to lose its independence are exerting significant pressure on the US dollar. The likelihood of a correction in the EURUSD pair appears limited, and a “buy-the-dip” strategy seems feasible. A more aggressive strategy involves selling the euro when the pair pierces 1.168, followed by a quick reversal as prices fall and rebound from the key support 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.
Price chart of EURUSD in real time mode
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