The discordant signals from the US, the EU, and China regarding trade conflicts are compelling investors to turn to other, more understandable factors. Primarily, they focus on monetary policy. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- Weak US data is putting pressure on the US dollar.
- Donald Trump is calling on the Fed to cut rates.
- The ECB will not signal any change in policy.
- Long trades on the EURUSD pair formed above 1.133 can be kept open.
Weekly US Dollar Fundamental Forecast
Investors are shifting their focus back to monetary policy amid the complexities of trade wars. A fresh batch of weak US economic reports has triggered the sharpest decline in Treasury yields since mid-April, forcing EURUSD bears to retreat. Donald Trump has once again urged the Fed to lower interest rates. Meanwhile, the derivatives market stands in support of his position. The market has increased the likelihood of a sharp rise in borrowing costs in July from 24% to 30%. This is particularly noteworthy in light of the upcoming release of US employment statistics.
The intricacies of trade wars can be perplexing, leading to unnecessary complications. The International Trade Court has ruled that import duties are illegal, but Donald Trump is imposing tariffs on steel and aluminum. The EU has issued a warning of potential retaliation while also recognizing the advancement in negotiations with the US. The US administration has issued a series of letters cautioning all sides that the 90-day deadline is approaching, and it is time to make more favorable offers. At the same time, Secretary of Commerce Howard Lutnick has announced an impending agreement with India. Beijing and Washington have accused each other of failing to fulfill their obligations, and the US President has stated that Xi Jinping is extremely challenging to do business with.
Against this background, it is not surprising that traders seek guidance from monetary policy. A recent survey of Bloomberg experts indicates a consensus that the European Central Bank (ECB) will likely reduce its deposit rate to 2% at the upcoming June 5 meeting. Another rate cut is expected before the end of 2025, in September.
Expectations for ECB Rate Cut
Source: Bloomberg.
Christine Lagarde will unlikely signal the end or continuation of the cycle during the press conference. The ECB anticipates a slowdown in inflation, primarily due to the adverse effects of trade wars on domestic demand, the strengthening of the euro, and China’s strategic redirection of inexpensive goods from the US to Europe. However, in the long term, fiscal stimulus and adaptation to tariffs could spur inflation.
The eurozone economy and the euro are still vulnerable to the potential impacts of the US administration’s trade policy.
Major Risks for Eurozone Economy
Source: Bloomberg.
Meanwhile, US statistics indicate that the economy is cooling due to tariffs. Private sector employment from ADP increased by a modest 37,000 in May, compared to forecasts of 100,000, posting the weakest figure in two years. The ISM Services PMI fell below 50 for the fourth time in the last 60 months.
Weekly EURUSD Trading Plan
The US President’s repeated calls for the Fed to lower the federal funds rate and his public criticism of Jerome Powell stem from the weak macroeconomic data that was recently released. In addition, the data has dealt a blow to EURUSD bears. The major currency pair surpassed the 1.14 threshold. Long trades on the euro formed at 1.1225 and above 1.133 can be maintained.
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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