If monetary policy divergence has favored EURUSD bears in the first half of 2025, this trend will likely reverse in the latter half of the year. When combined with capital outflows from the US to Europe, this bodes well for the euro’s future. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The S&P 500 reached a record high in US dollars but not in other currencies.
- The end of the ECB’s monetary expansion cycle will reshape market conditions.
- Capital flows from the US to Europe are supporting the euro.
- Long positions on the EURUSD pair can be considered with targets at 1.2 and 1.22.
Weekly Euro Fundamental Forecast
US stock indices have reached record highs, serving as a real-time indicator of the US economy’s strength. Meanwhile, the current environment is characterized by a decline in political uncertainty. While investors previously anticipated that Donald Trump would implement tariffs with minimal opposition, recent developments have led to a shift in this perspective. The US leader is prepared to reconsider his position. According to the BIS, his criticism of the Fed does not pose a threat to the central bank’s independence. So, has the EURUSD pair climbed too high? At this juncture, it is worth considering whether the time is right for American exceptionalism to make a comeback.
In fact, the S&P 500 index has reached a new all-time high in US dollars. In other currencies, it has yet to reach its record high. For the first time in many years, European stocks are outperforming their US counterparts. Money is flowing from the US to Europe, allowing the EURUSD pair to soar 13% since the beginning of the year.
S&P 500 Performance in Currencies and Gold
Source: Bloomberg.
While corporate profits in Europe may not reach the same heights as those in the US, the fundamental valuation of stocks in Europe is significantly lower than their American counterparts. Investors are confident in the long-term potential of the EU economies, leading to increased euro purchases. This is particularly noteworthy, given the outperformance of German bonds compared to US Treasuries since April of this year.
The movement of capital across the Atlantic is disrupting intermarket links. Could anyone have predicted that the ECB’s aggressive cut in deposit rates, occurring against the backdrop of the Fed’s pause in its cycle, would lead to a rise in the EURUSD pair? Typically, the reluctance of Treasury bond yields to decline serves as a form of risk mitigation for the USD index. This time, however, the outcome was different.
US Dollar Index and Treasury Yields
Source: Bloomberg.
As the ECB’s monetary expansion cycle comes to a close, the headwinds for the euro, such as differing interest rate cuts, are shifting into tailwinds. The derivatives market anticipates more than two acts of monetary policy easing by the Fed, compared with no more than one for the European Central Bank. Along with the ongoing capital outflows, this development suggests the EURUSD pair could reach 1.2 in the coming months or even weeks.
Jupiter Asset Management anticipates a rise in the major currency pair to 1.3 within the next 6-8 months, with a projected reach of 1.4 by 2026. As the saying goes, appetite comes with eating. However, I would first assess the reaction of the EURUSD pair to the escalation of trade wars and the US labor market report for June. According to Donald Trump, there is no need to extend the 90-day tariff delay, and Japan’s sales of millions of cars to the US are unfair. It appears that the US administration has no plans to cancel its 25% tariffs on car imports.
Weekly EURUSD Trading Plan
If the EURUSD pair settles above 1.17, it will likely reach 1.2 and 1.22. The strategy of purchasing the euro against the US dollar remains valid.
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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