Despite a 15% devaluation of the US dollar during Donald Trump’s first term as president, this adjustment did not adequately address the US trade deficit. This will require a 50% devaluation. Let’s review the historical context, discuss this topic, and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- Increased risk appetite led to a pullback in the EURUSD pair.
- The US trade balance will be supported by the US dollar’s devaluation.
- Europe wants to redirect capital flows from Asia.
- A rebound from support levels at 1.1285, 1.1245, and 1.1165 is a great opportunity to buy the euro.
Weekly Euro Fundamental Forecast
When the US dollar becomes a risky investment and German bonds become the main safe-haven asset, it is not surprising that we see the EURUSD pair retreat. The euro failed to settle at 1.14, as a rally in US stock indices exerted significant pressure on the single currency. The decline in US Treasury yields fueled the correction. However, there is no reason to be overly optimistic about the retreat of the “Sell America” strategy.
If President Trump is serious about reducing the trade deficit, his administration will need to put in significant effort. The 15% depreciation of the US dollar during Trump’s first term had virtually no impact on the deficit. The range remained consistent, between 2.5% and 3% of GDP. Only the Plaza Accord concluded in 1985 led to a 50% devaluation of the US dollar, which helped stabilize the trade balance in the 1990s. Prior to that, in 1987, the trade deficit accounted for 3.1% of the US GDP.
The US administration has stated that it does not intend to weaken the US dollar; however, devaluation is a necessary condition for eliminating the foreign trade deficit. Asia has emerged as a key player in this arena, offering a promising solution to these challenges. For decades, the current account surpluses of countries in this region have been used to purchase US securities, but Donald Trump’s policies have effectively terminated the previously beneficial strategy. According to Eurizon SLJ Capital, if Asian countries were to unwind their large stockpiles, the US could experience a capital outflow of $2.5 trillion.
Asian Countries’ Purchases of US Securities
Source: Bloomberg.
Meanwhile, Europe is eager to replace the US and redirect Asian capital flows in its favor. ECB President Christine Lagarde has emphasized that the EU must clearly convey its status as the most attractive global partner. At the same time, the ECB head approved the decision by Germany and other European countries to allocate additional funds to defense, with the aim of supporting the euro. According to Lagarde, investors would be more inclined to invest in regions that are reliable allies in terms of security.
The strategy is straightforward: engage in trade with Europe, generate revenue, and allocate it towards European assets. As a result, the euro will be poised to become a dominant currency in the Asian capital flows, with its share in international settlements and foreign exchange reserves set to rise. To achieve this objective, it is imperative to impose restrictions on exports and implement a substantial weakening of monetary policy to bolster the rally of European stock indices. In this instance, the opportunity is worthwhile despite the potential challenges.
Weekly EURUSD Trading Plan
The EURUSD pair is poised to rise, driven by Donald Trump’s vision of a weaker dollar to balance the trade deficit and Europe’s strategic efforts to enhance the appeal of the euro. The current correction presents a favorable opportunity to purchase the major currency pair. Long positions can be considered on a rebound from support levels of 1.1285, 1.1245, and 1.1165.
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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