Despite U.S. stock indices falling due to renewed White House tariff threats, EUR/USD bears are staying in the fight. They’re counting on Fed support to restore confidence in the dollar. Let’s discuss it and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The Fed plans to keep the rate at 4.5%.
- Odds of resuming monetary expansion in June are fading.
- The central bank is choosing between recession and stagflation.
- Buying EUR/USD on a breakout above $1.1355 remains relevant.
Weekly Fundamental Forecast for Dollar
The truth always comes out. No matter how much the White House hides its aggressive stance, Donald Trump’s 100% tariffs on foreign film imports show that tariff threats are alive and well. This factor, along with Trump’s renewed criticism of Jerome Powell, will drive EUR/USD to $1.22 within 12 months, according to Danske Bank. But first, the main currency pair must navigate a turbulent period.
The U.S. administration keeps using conciliatory rhetoric to calm markets. Commerce Secretary Howard Lutnick said he is very optimistic about the country’s economic outlook, claiming Trump will revolutionize trade. What used to take years is now done much faster. The U.S. can expect major deals within 90 days.
Treasury Secretary Scott Bessent noted that 17 of 18 key trading partners, except China, have approached the U.S. with strong trade proposals. Washington is close to deals. Combined with an unexpected pickup in business activity, such talk should have fueled the S&P 500’s rally. However, the 100% tariffs on foreign films spooked investors so much that the stock index slid downward.
Business Activity Indicator Dynamics
Source: Bloomberg.
The dollar’s path briefly diverged from stocks. The greenback is supported by expectations that the Fed won’t cut the federal funds rate at upcoming meetings. This helps EUR/USD bears by keeping U.S. asset yields high and reinforcing confidence in the central bank, which had been shaken by Trump’s criticism.
Business activity data, particularly the rapid rise in PMI price components, confirms the Fed is stuck choosing between recession and stagflation. It’s like a goalkeeper darting from corner to corner, trying to guess the opponent’s penalty shot. Cut rates, and you risk runaway inflation. Hold steady, and the economy might slip into recession.
Over seven years leading the Fed, Jerome Powell has proven he’s data-driven, holding off until the last moment before acting swiftly. This approach is justified given the White House’s heightened policy uncertainty. No wonder the derivatives market slashed the probability of a federal funds rate cut in July from 65% to 27%.
Economic Policy Uncertainty Dynamics
Source: Bloomberg.
Weekly Trading Plan for EUR/USD
Thus, EUR/USD bears may get a boost from the Fed, but the main currency pair’s long-term outlook remains bullish. Buying the euro on a breakout above resistance at $1.1355 remains a solid strategy.
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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