Trying to bring back past glory rarely ends well. The world changes, while memories of "the good old days" comfort only the elderly. Tariffs like those of the 1930s and pressure on the Fed similar to the 1940s could end up ruining the US dollar. Let's discuss it and make a trading plan for EURUSD.
The article covers the following subjects:
Major Takeaways
- The US still finds it hard to give up Chinese imports.
- The White House will keep pressuring the Fed.
- Slowing US–EU GDP growth gap is negative for the dollar.
- A breakout above 1.164 is a signal to build up EURUSD longs.
Weekly Fundamental Forecast for Dollar
Back to the Future. The presidents of Russia and the United States have something in common: both believe that life was better in the past. The sun shone brighter, the grass was greener. As a result, one dreams of reviving an empire, while the other wants to restore America's "golden age." Tariffs have climbed to their highest levels since the 1930s. The White House is putting pressure on the Fed as if it were the 1940s again, when interest rates stayed near zero for years to help the government keep its borrowing costs low.
Be careful what you wish for. The "things were better before" mindset may comfort older people, but it doesn't work for the economy. The world has changed. Tariffs hurt the US more than they hurt China. American importers depend far more on Chinese goods than Chinese exporters depend on the US market. The shift and expansion of global supply chains prove it, even though exports to the US have fallen amid 55% tariffs.
China's Exports to the US
Source: Bloomberg.
Combined with Beijing's control over rare earth minerals and Donald Trump's sensitivity to US stock market performance, this gives China strong leverage in trade talks. No wonder both sides quickly reached an understanding earlier this year. Optimism about de-escalation in the trade conflict has encouraged investors to move from the TACO trade back into "buying America." Both stocks and the dollar are rising. The question is: how long can the EURUSD bears enjoy this music?
Morgan Stanley believes this won't last long. The greenback will likely weaken as the next Fed rate cut approaches. The narrowing gap between US and global GDP growth, including the eurozone, will also weigh on the USD index. Add to that the dollar's fading role as a safe haven and as a hedge for foreign investors in US equities, and EURUSD's outlook starts to look much brighter.
US Debt Servicing Costs
Source: Wall Street Journal.
In my view, no one intends to give up their ambitions. The war in Eastern Europe will continue, tariffs won't disappear, and Donald Trump will do everything he can to make the Fed cut rates further. That would also lower the government's interest burden, now exceeding $1 trillion — more than total defense and national security spending combined.
I agree with Morgan Stanley. Tariffs will gradually cool the US economy and narrow its growth gap with other regions. Continued White House pressure on the Fed will speed up monetary easing and create additional headwinds for the dollar.
Weekly Trading Plan for EURUSD
Although EURUSD longs opened from 1.16 look unstable, a move back above 1.164 would be a good reason to build them up.
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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