When Donald Trump took office, investors were eager to purchase the US dollar. It was believed that American exceptionalism would gain strength. Instead, it is evaporating, prompting a rally in the EURUSD pair. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Investors are getting rid of toxic US assets.
- The USD index collapsed by 7%, and this is not the limit.
- The Fed’s independence is under threat.
- Long trades on the EURUSD pair can be opened with targets of 1.16 and 1.195.
Weekly US Dollar Fundamental Forecast
The actions of the 47th President of the United States have a greater impact on investor behavior than his words. Initially, investors believed in the America First policy. However, by the end of April, a significant shift had occurred. Markets have recently recognized that the core of the Trump trade is actually the “sell America” trade. US assets are becoming increasingly risky, and investors are disposing of them promptly. As a result, the EURUSD pair is rising rapidly.
The USD index has already fallen by 7% since the beginning of the year, but the scale of the potential collapse is mesmerizing. According to Apollo Management, non-residents hold a significant stake in US markets, with $19 trillion in US stocks and $7 trillion in US Treasuries. They also control 20% to 30% of the US corporate bond market, underscoring their substantial influence in these financial sectors. A reduction in these holdings could have significant ramifications for both the markets and the economy. As expected, the US dollar is declining as Treasury yields surge.
10-Year US Treasury Yield and USD Index Performance
Source: Bloomberg.
However, Donald Trump has found a scapegoat for the potential recession triggered by the US administration’s protectionist policies. He has publicly criticized Jerome Powell, the Fed Chairman, and has called him “a major loser” and “Mr. Too Late” for his approach to inflation. Trump has also called for a cut in the federal funds rate based on the argument that inflation is virtually non-existent.
The US president’s position is echoed by members of his team. In his 2021 book, Kevin Hassett noted that removing Jerome Powell from his position would adversely impact confidence in the US dollar, thereby undermining the credibility of the US regulator. However, the director of the National Economic Council has stated that the central bank’s recent decisions have been influenced by political factors. The current administration has expressed concerns that the Federal Reserve may have adjusted interest rates in anticipation of the November elections, with the aim of favoring Joe Biden and Kamala Harris.
In fact, the Fed’s actions were intended to support the cooling labor market, which now remains robust. The slowdown in US inflation is attributed to tight monetary policy; however, the US tariffs are likely to accelerate the PCE index. If the cycle of monetary expansion resumes, history may repeat itself, as it did in the 1970s. At that time, the central bank’s actions aligned with those of the US President, leading to a double-dip recession.
Weekly EURUSD Trading Plan
Does Donald Trump really understand what he is doing? His criticism of Jerome Powell undermines the autonomy of the Fed, a core tenet of American exceptionalism. The decline in the S&P 500 signifies an escalation in capital flight from the US. The greenback continues to face significant headwinds. The EURUSD pair is approaching the first of two previously established targets of 1.16 and 1.195. Against this backdrop, traders can consider opening long trades.
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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