The ongoing policy uncertainty surrounding President Trump’s administration threatens the US economy, as it could lead to a downturn. Conversely, Germany’s shift from austerity to spending benefits the euro. Let’s discuss these topics and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The euro has posted its strongest performance since 2009.
- Speculators have reduced their short positions in the US dollar for the seventh consecutive week.
- The Fed is maintaining a pause in the current monetary expansion cycle.
- Short trades can be maintained as long as the EURUSD pair remains below 1.085.
Weekly US Dollar Fundamental Forecast
While Europe is experiencing a period of euphoria due to Germany’s shift toward fiscal stimulus, political uncertainty in the US is increasing the risk of recession. Consequently, speculators are selling the US dollar for the seventh consecutive week, and the EURUSD pair has achieved its strongest weekly performance since 2009. The disparity between expectations and reality on both sides of the Atlantic has led to a significant rally in the major currency pair.
Speculative Positions on US Dollar
Source: Bloomberg.
While Jerome Powell asserts that the Fed is not required to take any action in the present circumstances and that the central bank can postpone rate cuts, the derivatives market is expanding the estimated scope of monetary expansion. The market anticipates three rate hikes before the end of 2025, a significant shift from its initial projections of one or two hikes at the start of the year. This shift is attributed to a series of weak data on the US economy, which increases the risk of a recession.
Donald Trump has acknowledged the potential for a recession. The US President has suggested that the current policies could lead to short-term turbulence that will stimulate the future prosperity of the economy. Treasury Secretary Scott Bessent has stressed that the US requires a ‘detox period’ to eliminate its reliance on government spending.
In contrast, Germany is pursuing a different approach. Years of fiscal consolidation have led to a depressed economy, with a projected recession in 2023–2024. However, Friedrich Merz’s ambitious plans have generated optimism about a rosy future. Money is flowing into Europe, driven by record stock indices and expectations of substantial fiscal stimulus, resulting in the fastest EURUSD rally since 2009.
Euro Weekly Performance Against US Dollar
Source: Bloomberg.
The trajectory of the major currency pair will depend on whether the pessimistic scenario for the US and the optimistic one for Germany are implemented. According to Jerome Powell, the Fed should see tangible progress in inflation and some weakening in the labor market. The 151,000 employment growth in February was deemed solid by the Fed chairman.
This prompted a profit-taking move in the EURUSD exchange rate. The question remains whether Friedrich Merz will secure a two-thirds majority in parliament to reform the fiscal brake. The impending US trade war with the EU and its potential impact on the eurozone economy are also key factors to consider. These concerns have tempered EURUSD bulls.
Weekly EURUSD Trading Plan
The US CPI data for February may trigger volatility again. The ongoing disinflationary trend could lead to a surge in US dollar sales. Conversely, a surge in prices could prompt a shift toward short positions in the EURUSD. At present, the euro is poised to enter a short-term consolidation phase. As long as it remains below 1.085, short trades can be considered.
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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