The United States quickly recovered after the pandemic and avoided a recession following the Fed’s most aggressive rate hike cycle in four decades. Will tariffs break the economy this time? Let’s discuss it and make a trading plan for EUR/USD.
The article covers the following subjects:
Major Takeaways
- The dollar ends its first positive month since the inauguration.
- The average US tariff rose from 2.3% to 15.2%.
- Investments and fiscal stimulus will support the US economy.
- A breakout below 1.14 is a signal to build up EUR/USD short positions.
Weekly Fundamental Forecast for Dollar
The US dollar has posted its first winning month since Donald Trump’s inauguration. The resilience of the US economy, the Fed’s reluctance to cut rates, trade deals favorable to the US, a stock market rally, and the gradual decline in foreign currency hedging have all fueled the EUR/USD collapse. How long can this continue?
Monthly USD Dynamics
Source: Bloomberg.
US tariffs now range from 10% to 41%, with the average rising from 2.3% to 15.2%. According to Bloomberg, it will reduce economic growth by 1.8 percentage points and accelerate inflation by 1.1 percentage points over two years. Globally, import duties are likely to dampen demand among trade partners. Final GDP and consumer price figures will depend on how much of the tariff burden companies absorb and how much they pass on to consumers.
The big question is: how resilient is the US economy to trade shocks? Can it pull off a third miracle in five years? The first happened after the COVID pandemic, when GDP quickly bounced back. The second came after the Fed’s most aggressive monetary tightening in 40 years. Back then, everyone was talking about a recession, but what actually followed was a soft landing.
In truth, anything is possible. The US is expected to attract over a trillion dollars in foreign investment. Coupled with $3.4 trillion in fiscal stimulus, this could fuel another economic boost. American exceptionalism may return to market narratives. The Fed may hold rates through 2025, and the greenback could continue strengthening.
What could support the euro? Hopes that the ECB is done easing? Unlikely. German inflation has fallen below the ECB’s 2% target for the first time in 10 months. German manufacturers warn that the US–EU trade agreement will undermine Europe’s competitiveness.
Market Expectations for ECB Rate Cuts
Source: Bloomberg.
EUR/USD’s best hope may lie with Donald Trump himself — his pressure on the Fed undermines confidence in the dollar. In the longer run, the euro’s recovery depends on global resilience to US tariffs and a shift in global supply chains. If international trade thrives beyond US borders, export-driven economies like those in Europe could benefit, and the US may end up the loser.
Weekly Trading Plan for EUR/USD
As long as the US economy stays strong and prospects improve, the dollar is likely to strengthen. Even a hint of weakness may bring rate cut expectations for September back into focus. Over the past month, the odds of such a move have dropped from 64% to 35%. The US jobs report for July could act as a litmus test. Only very weak stats could stop EUR/USD from falling. In all other scenarios, the best strategy remains building up short positions, especially on a breakout below support at 1.14.
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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