Despite the reduction in import duties, the universal tariff of 10% will remain in force, which may spur inflation and force the Fed to keep the interest rate at 4.5%. 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 concluded a deal with China.
- Details of the agreement will be announced later.
- The Fed will keep interest rates at 4.5% for an extended period.
- Short trades can be kept open while the EURUSD pair remains below 1.13.
Weekly US Dollar Fundamental Forecast
The most unfavorable possible outcome — a failure to reach an agreement between the United States and China — was averted. Financial markets can continue to thrive. That is, of course, if they choose to do so. The EURUSD pair opened the week with a downward gap, signaling growing demand for American products and services. As a result, the US administration endeavored to maintain the intrigue surrounding the matter, indicating that details of an agreement between the world’s two largest economies would be revealed on Monday.
According to Treasury Secretary Scott Bessent, the talks with China were fruitful. Jamieson Greer shed more light on the matter. The trade representative noted that the differences in the positions of Washington and Beijing were not as significant as many had anticipated, and the nations managed to reach a preliminary agreement. The primary motivation behind the US tariffs was the significant foreign trade deficit with China, and both parties are committed to resolving their differences.
Washington and Beijing are interested in de-escalation. Donald Trump continues to regard stock market performance as the primary metric for assessing his effectiveness as US president, and the S&P 500 rally, fueled by positive trade negotiations, aligns seamlessly with his perspective. China is experiencing a significant slowdown in exports, recognizing that even substantial stimulus measures will unlikely reverse this trend.
China’s Exports to US
Source: Bloomberg.
At the same time, markets are accepting the idea that no matter how much import duties are reduced, the universal tariff of 10% will remain in place. This has the potential to increase the risk of inflation and compels the Fed to maintain the federal funds rate at 4.5%. The derivatives market continues to expect three rate cuts in 2025, though some suggest that borrowing costs will remain unchanged until the end of the year. On paper, this scenario assumes a stronger US dollar.
However, trading strategies that proved effective in 2024 may not be applicable in 2025. At present, capital flows are the primary driving force behind exchange rates in the Forex market. The diversification of investor portfolios in favor of European securities indicates the sustainability of the upward trend in the EURUSD pair. The current downward movement is nothing more than a correction.
Indeed, the derivatives market points to the euro’s sustainable rally against the US dollar. Notably, 12-month risk reversals for the major currency pair have exceeded one-month reversals for the first time in three years. This is a long-term trend that is being influenced by what is referred to as “smart money” — large institutional investors.
EURUSD Risk Reversals Spread
Source: Bloomberg.
Weekly EURUSD Trading Plan
Against this backdrop, traders may want to purchase the EURUSD pair at a lower price. While the major currency pair is trading below 1.13, short positions initiated at 1.1325 can be kept open. At the same time, long trades can be considered on a rebound from strong support levels of 1.117 and 1.1065.
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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