The de-escalation of the trade conflict between the US and China is beneficial for the euro as a pro-cyclical currency. However, capital outflows from the US may not be as substantial as initially anticipated, which is favorable 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 Fed’s reluctance to cut rates is not helping the US dollar.
- Investors continue to lose confidence in the greenback.
- Capital flows favor the euro.
- Long trades on the EURUSD pair initiated at 1.0165 can be kept open.
Weekly US Dollar Fundamental Forecast
Markets reacted positively to the news that the weighted average tariff of 39% for China, considering previously imposed duties, is the ceiling, and 8% for the UK, considering exceptions, is the minimum in the US administration’s trade policy. However, even these figures are high enough to undermine confidence in the greenback. The recent rebound of the EURUSD pair from 1.1065 suggests that bears are losing their grip.
HSBC has observed that, based on bond yield differentials and other indicators, the USD index should have soared higher. Indeed, when considering monetary policy, the derivatives market has reduced the expected scale of monetary expansion from four acts at the end of April to two after the release of US inflation data, a strong factor in favor of selling the EURUSD pair. The bank has determined that the issue stems from the erosion of confidence in the US dollar.
Market Expectations on Fed Cuts
Source: Bloomberg.
Meanwhile, Germany’s shift from fiscal restraint to profligacy, in conjunction with Donald Trump’s protectionist policies, has precipitated a massive shift in financial markets. While hedge funds have rapidly sold US dollars, asset managers are shifting their investment portfolios toward European and other stocks. This is a time-consuming process, prompted by the acknowledgment that investing in US stocks is not as secure as previously believed.
Speculative Positions on US Dollar
Source: Bloomberg.
The responsibility for this situation clearly lies with Donald Trump. He has decided to make significant changes to international trade and the financial system, which has led to some discontent among investors. For example, the US president has called on the Fed to ease monetary policy. In light of the recent CPI data, the US President has observed that inflation is currently nonexistent, and prices for gasoline, energy, food, and a wide range of other goods and services are declining. As a result, the Fed must have lowered the interest rate.
In reality, the Fed is an independent institution. While inflation in the US decelerated in April, the impact of tariff increases on the latest report has not yet been reflected. The US will face all the side effects of the “Liberating Day” in May or June, and the de-escalation of the trade conflict is another reason for the US regulator to take a wait-and-see approach. If there is no recession, the Fed will not slash the interest rate. However, is the US economy robust enough to withstand these challenges?
Weekly EURUSD Trading Plan
The reduction in tariffs is a positive development for global GDP and pro-cyclical currencies such as the euro. Conversely, the US capital account is expected to deteriorate less than anticipated, which bodes well for the US dollar. The EURUSD pair may find refuge in medium-term consolidation. Therefore, long positions formed on the rebound from 1.065 can be kept open.
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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