The US has set the same tariff rates for most countries since the Liberation Day. For some, they have been raised. However, the US dollar’s reaction differed significantly from its performance in early April. What are the reasons behind this? Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- Washington has returned to higher tariffs.
- The US economy can withstand strong headwinds.
- Donald Trump is preventing the Fed from cutting rates.
- Long trades on the EURUSD pair can be opened on pullbacks with targets of 1.2 and 1.22.
Weekly US Dollar Fundamental Forecast
Tariffs are not the determining factor in the dollar’s fate; rather, it is the underlying factors that play a crucial role. On the Liberation Day, the USD index plummeted due to concerns that import duties would accelerate inflation, force the Fed to maintain high federal funds rates for an extended period, and potentially trigger a recession. By the conclusion of the 90-day tariff delay, it became evident that the US economy would remain resilient. The reintroduction of higher tariffs did not dissuade EURUSD bears. In response, they initiated a counterattack.
President Trump imposed tariffs on most countries with the same schedule as those implemented on the Liberation Day. For Japan, tariffs were raised from 24% to 25%, which likely indicates the US President’s dissatisfaction with Tokyo’s reluctance to compromise. Concurrently, the US President uses import duties as a corrective measure to address long-standing tariffs, non-tariff policies, and trade barriers that have contributed to the United States’ foreign trade deficit. For Forex traders, the greenback’s reaction is of particular importance.
According to Barclays, the US administration’s strategic shift in policy and the successful conclusion of trade deals indicate that the US economy will not face as significant challenges as initially predicted. It is possible that the tariffs have already been priced into the USD index quotes. It has experienced a decline of over 9% since the beginning of the year. However, given the significant number of bearish positions on the US dollar, the potential for a market correction is increasing.
Speculative Positions on US Dollar
Source: Bloomberg.
At the end of 2024, it was anticipated that tariffs would hurt the economies of other countries, prompting their central banks to consider lowering interest rates. Conversely, the Fed would maintain its current rate amid accelerating inflation in the US, and the US dollar would appreciate in value against major world currencies. However, the ECB and other regulators eased monetary policy even before their economies began to falter under the impact of import tariffs. They provided the necessary safety cushion and approached the end of their easing cycles.
Fed Funds Rate Trajectory
Source: Bloomberg.
The US inflation rate shows no signs of accelerating, which allows the Fed to lower interest rates. However, Donald Trump is taking measures to prevent this. That is correct; he is actively preventing it. The US administration’s calls for a significant reduction in borrowing costs are constraining the Fed’s ability to implement desired policies. If Jerome Powell decides to resume the cycle of monetary expansion, he will claim to be following the president’s directives. This approach raises concerns about the central bank’s autonomy, which is not aligned with the government’s stated objectives.
Weekly EURUSD Trading Plan
Investors have expressed significant pessimism regarding the outlook for the US economy due to the impact of tariffs. Does the EURUSD pair require a full-fledged correction? If it weren’t for Donald Trump, I would be inclined to agree. However, the US President’s actions and his desire to see a weaker dollar support the scenario where the euro rally continues towards 1.2 and 1.22. Therefore, the single currency can be purchased 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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