The markets should drop significantly for Trump to back down. However, they are not doing so, hoping for the TACO factor. The US president believes he can get away with anything and will continue doing what he wants. Let's discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US economy is accelerating.
- The Fed may resume its pause in the rate-cutting cycle.
- Trump's erratic behavior is likely to continue.
- Short trades on the EUR/USD pair can be opened at 1.1775 and 1.182.
Weekly US Dollar Fundamental Forecast
The rally in EUR/USD quotes seems counterintuitive given the strong US macroeconomic statistics, which allow the Fed to extend the pause in the monetary expansion cycle. Moreover, fears that the central bank will lose its independence because the Supreme Court backed Lisa Cook have subsided, and Donald Trump has backed down from his plans to take over Greenland. Analysts are trying to explain the greenback's decline by increased global risk appetite, but given higher interest rates and uncertainty surrounding US policies, the dollar is the riskier asset, not the euro.
The Sell America gave way to the TACO trade. US stocks and bonds are rising, while the USD index is not. It may seem like nonsense, especially since third-quarter GDP data was revised upward to 4.4%. The US economy accelerated from 3.8% in the second quarter, and the Atlanta Fed's leading indicator for the fourth quarter shows an impressive 5.4% figure! Unemployment claims are not rising, which signals stabilization in the labor market. The personal consumption expenditure index has settled at 2.8%.
US GDP
Source: Wall Street Journal.
This means only one thing: the Fed has no plans to change course before June. The interest rate differential with the ECB will remain wide, and carry traders can sell the euro and buy the dollar without a second thought. However, the EUR/USD pair has suddenly shot up for some reason.
The first explanation is that the US has put Europe in an uncomfortable position. For a long time, Washington has insisted that Brussels increase its defense spending. The EU nodded, but did nothing until 2025. After Donald Trump's escapade with Greenland, it has become clear that the former international balance of power has been undermined. Europe has been left to deal with its problems alone. Meanwhile, the euro is supported by hopes for increased budget spending and fiscal stimulus.
The second version is that the US is worried about a sell-off of US assets. Donald Trump is threatening retaliation against Europe if it tries to do this. At the same time, Scott Bessent said that the idea of selling US assets came from a single analyst at Deutsche Bank.
Odds That US Will Take Control of Greenland
Source: Wall Street Journal.
Finally, the third scenario implies that the TACO trade is losing credibility. It would require a significant decline in stock indices to cause Trump to retreat. However, investors are highly confident that this will occur, and the markets are not falling significantly. This means that the US leader has the freedom to pursue his agenda. The Kalshi prediction market gives a 44% probability that the US will gain control over Greenland. Indeed, the odds have fallen from 65%, a figure seen before the World Economic Forum in Davos, but they are nonetheless high.
Weekly EURUSD Trading Plan
Donald Trump will likely stick to his agenda. However, given the Fed's prolonged pause, short trades on the EUR/USD pair can be considered if the price fails to remain above 1.175 or rebounds from 1.1775 and 1.182.
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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