The euro was hoping for the best, but got the worst. A rise in the average tariff from 1.2% to 17% and a stronger regional currency are a double blow to the eurozone’s export-driven economy. Let’s discuss it and make a trading plan for EUR/USD.
The article covers the following subjects:
Major Takeaways
- EUR/USD recorded its worst plunge since May.
- The average tariff on EU goods will rise from 1.2% to 17%.
- Capital flow reversal is a headwind for the euro.
- Short positions opened on the rally toward 1.18 and the breach of 1.173 should be held.
Weekly Fundamental Forecast for Euro
The US–EU trade deal is no victory for the euro. EUR/USD’s worst decline since May proves that. The eurozone is facing a double blow from tariffs and a strong currency, and that spells trouble for the export-driven region. The euro area’s GDP could fall short by 0.4 percentage points, but that’s not the worst part. According to Deutsche Bank, the need to invest $600 billion in the US economy will divert capital from the Old World to the New.
Countries Hurt by the US–EU Deal
Source: Wall Street Journal.
Along with the loss of confidence in the greenback due to Donald Trump’s policies, one of the key factors in the EUR/USD rally in 2025 was the capital flow from the US to Europe. The slogan “sell American” and Germany’s pivot from fiscal restraint to spending helped EuroStoxx 600 outperform the S&P 500 for the first time in years. The trade agreement between Washington and Brussels changes everything.
According to Capital Economics, the average tariff on European exports to the US could rise from 1.2% to 17%. Meanwhile, the ECB had expected a favorable scenario in which import duties remained at 10%. Instead, it got something worse. This could mean the monetary easing cycle may resume.
Former ECB President Mario Draghi believes Europe needs to increase investment by $900 billion to compete with the US. Instead, it will invest $600 billion into the American economy. The outperformance of Old World stock indices over their New World peers is likely to reverse. The capital flow reversal threatens to break the EUR/USD uptrend.
According to Wells Fargo, the decline in the main currency pair reflects a growing awareness that tariffs could slow global economic growth. This point was highlighted in my previous analyses. The euro is a currency of optimists. It rallied from January to July thanks to accelerating global GDP and a surge in US imports. From August to December, everything will turn upside down.
Donald Trump’s Tariff Dynamics
Source: Wall Street Journal.
But what about the White House’s desire to weaken the US dollar? As long as the Fed resists cutting rates and the likelihood of Jerome Powell being fired drops, confidence in the greenback will remain high.
Thus, the euphoria over the surprisingly strong resistance of the European and global economies to White House tariffs is fading. The reversal in capital flows could lead to a deep correction in EUR/USD. The longer the Fed holds rates and the stronger the labor market, the deeper the pullback will be.
Weekly Trading Plan for EUR/USD
In these conditions, the short positions on EUR/USD opened on the rally to 1.18 and the breach of 1.173 turned out to be a smart move. They should be held and adjusted based on the outcome of the FOMC meeting and the release of employment data.
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
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
