
The US president’s decision to impose import duties on Mexico and Canada, followed by a subsequent delay until March 1, sent a shockwave through financial markets. Investors believe that the president is using tariffs as a negotiating tool rather than a revenue source. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- Tariffs against Mexico and Canada have been postponed until March 1.
- US protectionism is hitting the already weak eurozone economy.
- The Fed will keep pausing due to the uncertainty of Trump’s policies.
- Short trades on the EURUSD pair can be opened with targets of 1.012 and 1.000.
Weekly US Dollar Fundamental Forecast
The White House asserts that the media has misinterpreted the signals sent by President Donald Trump, leading to speculation about the potential for a trade war or a war on drugs. Before February 1, the market was confident that the tariff threats were a bluff. However, following the introduction of these tariffs and the subsequent one-month postponement for Canada and Mexico, investors have adjusted their assumptions, anticipating that any duties will be temporary. The uncertainty surrounding the potential consequences of these actions has led to a heightened demand for the US dollar as a safe-haven asset, pushing the EURUSD pair closer to parity.
Financial institutions such as Goldman Sachs have predicted that the euro will likely lose up to 8–10% in the event of a global trade war. However, Deutsche Bank anticipates a decline to 0.98–0.99 even if a trade war does not spark. The impact is expected to be confined to 10% US tariffs imposed on Beijing. China is expected to flood Europe with cheap goods, which could potentially lead to a resurgence of deflation in the region and further exacerbate the decline in German exports to Asia, potentially triggering a recession.
The eurozone economy, even without the impact of Donald Trump’s tariffs, is precariously balanced, and inflation is gradually declining, compelling the ECB to lower the cost of borrowing. According to the derivatives market, the deposit rate is projected to decrease by an additional 83 basis points by the end of 2025. As expected, investors are currently engaged in active discourse regarding the potential for parity in the EURUSD pair, anticipating that this will occur in the second quarter.
Market Expectations on EURUSD Parity
Source: Bloomberg.
In any given currency pair, there are always two currencies involved. While the euro appears weak, the US dollar is unambiguously strong. Discussions about tariffs can fuel inflation expectations, and Chicago Fed President Austan Goolsbee has begun to voice the need for the Fed to act more cautiously amid growing uncertainty surrounding the Trump administration’s policies. Moreover, there are concerns that inflation could start to accelerate again. This perspective is noteworthy as it comes from one of the Federal Open Market Committee’s (FOMC) most dovish members.
US Inflation Expectations
Source: Wall Street Journal.
The America First policy implemented by Donald Trump is likely to have adverse consequences for other countries, further consolidating the United States’ dominance. The high demand for the US dollar as a safe-haven currency, coupled with the divergence in monetary policy between the Fed and the ECB, is expected to contribute to a significant decrease in the EURUSD exchange rate.
Despite the introduction of a one-month delay in tariffs against Mexico and Canada, the major currency pair has not shown any signs of a recovery. EURUSD bulls have failed to reverse the downtrend. If market expectations are not met, there is a higher probability of a market shift in the opposite direction.
Weekly EURUSD Trading Plan
The attempt to close the gap that appeared at the beginning of February presented an opportunity to open short trades on the EURUSD pair, adding them to the ones initiated at 1.047 and 1.0415. Against this backdrop, the strategy of selling the euro against the US dollar with the targets at 1.012 and the parity level remains relevant.
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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