In the past, the “dovish” rhetoric of Fed officials would have sunk the U.S. dollar. Now, the greenback is rising to the surface, thanks to the reaction of stock indices. Let’s discuss it and make a trading plan for EURUSD.
The article covers the following subjects:
Major Takeaways
- The dollar is reacting to the movement of U.S. stock indices.
- The Fed will resume a cycle of monetary expansion.
- The White House maintains a conciliatory tone.
- A rebound of EUR/USD from 1.1285 will be a reason to buy.
Weekly Fundamental Forecast for Dollar
Donald Trump blinked, and investors liked it, and what’s good for U.S. stock indices is good for the dollar. The correlation between the greenback and the S&P 500 has turned positive, so we can understand where EURUSD is headed by watching stock market trends. A rally in stocks, fueled by the White House’s conciliatory tone toward the Fed and China, strong durable goods orders, and FOMC officials’ comments about potential rate cuts, is driving a correction in the main currency pair.
S&P 500 and U.S. Dollar Correlation Dynamics
Source: Bloomberg.
Oh, how times have changed! Before Donald Trump’s return to the White House, hints from Fed representatives about easing monetary policy would have dragged the dollar down. Now, the greenback is floating up due to their “dovish” rhetoric. Christopher Waller says tariffs will cause a temporary spike in inflation, so the Fed should overlook rising prices. However, a cooling labor market could prompt rate cuts. Cleveland Fed President Beth Hammack believes a new cycle of monetary expansion might start as early as June.
Such talk is music to the S&P 500’s ears, and to EURUSD bears. No wonder, since the rally in the main currency pair stems from the loss of American exceptionalism and the sell-off of U.S.-issued assets. If those assets recover, the euro will have to void its grand bullish plans.
However, Deutsche Bank believes that the negative impact of tariffs on the U.S. economy, Germany’s fiscal expansion, and a reassessment of Washington’s role in global affairs will push EURUSD to 1.3 by the end of 2027. Trump’s policies reduce foreign investors’ interest in funding the twin deficits — budget and trade — leading to a gradual retreat from U.S. assets and encouraging other countries to boost fiscal spending.
I’d add that a weaker greenback hurts corporate profits and will restrain the S&P 500’s rally. Only a third of companies earn revenue abroad. The rest focus on the domestic market and struggle with rising import prices and reduced purchasing power in the United States.
S&P 500 Future Earnings and U.S. Dollar Dynamics
Source: Bloomberg.
Despite Trump’s efforts, who claims, contrary to Beijing’s word, that the White House is negotiating with China, the S&P 500 is unlikely to resume its upward trend soon. More likely, the broad stock index will face consolidation, which may result in EURUSD settling into a defined trading range.
Weekly Trading Plan for EUR/USD
The main task is to identify this range. You can try doing this by buying the pair on a rebound from supports at 1.1285, 1.124, and 1.118. Another option is to go long on EURUSD on a breakout above resistance at 1.14.
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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