With the establishment of definitive tariff rates, global risk appetite increases, enabling the Fed to cut rates faster than expected. This clarity allows the EURUSD pair to rise. Let's discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The European Union is bracing for US tariffs of 15%.
- Trade deals boost financial market confidence.
- The derivatives market expects the Fed to cut rates by 75 bps in 2026.
- Short trades can be opened if the EURUSD pair fails to break through 1.18.
Weekly US Dollar Fundamental Forecast
As Donald Trump continues to finalize trade deals, the markets are displaying increased confidence. Global risk appetite rises, and demand for the US dollar as a safe-haven asset declines. However, it would be premature to speculate on the potential loss of the dollar's status as a global reserve currency. The US market is too large, and the share of the US dollar in gold and foreign exchange reserves, international settlements, and Forex conversion operations is too high. As a result, the S&P 500 index has hit a new record high, boosting the EURUSD pair.
Donald Trump stressed that access to the American market is a privilege, not a right, and it requires a payment between 15% and 50% to enter it. Following Japan's agreement to the minimum rate, the European Union is prepared to follow suit. Trump's threats to impose tariffs on a third of US imports if the agreement is not signed by August 1 are a form of strategic pressure. According to a Wall Street Journal insider report, Brussels has agreed to a 15% tariff.
Market Expectations on Fed Rate Cuts
Source: Bloomberg.
Greater clarity in trade means that the Fed may return to easing monetary policy sooner than previously expected. At the same time, the derivatives market has adjusted its forecast of a federal funds rate cut in 2026. From April to July, the likelihood of a rate cut increased from 25 basis points to 76 basis points. Investors believe that Jerome Powell's replacement as Fed chair with someone more amenable to Donald Trump will accelerate the cycle of monetary expansion and further weaken the US dollar.
The Fed may find itself at a crossroads. According to Goldman Sachs, raising the US base tariff rate to 15% will reduce GDP growth by 1 percentage point in 2025 and accelerate inflation to 3.3%. The economy is expected to slow, with an estimated growth of 1%. The situation will likely begin to resemble a scenario of stagflation, which is characterized by high prices and a slowdown in economic growth. Against this backdrop, the US dollar will face significant pressure. The USD index typically experiences an upward trend during periods of economic strength or weakness. When neither fish nor fowl, it declines.
Forecasts for ECB Deposit Rate
Source: Bloomberg.
However, following the US, the global economy is also at risk of collapse. Will it be able to withstand tariffs of at least 15%? It is inevitable that prices will increase, despite the ECB's efforts to minimize expenses. Since the beginning of the cycle, the deposit rate has been reduced by 200 basis points. According to Bloomberg, the EU regulator will keep the rate unchanged at the July 24 meeting, while a quarter of analysts believe that 2% is the endpoint.
Weekly EURUSD Trading Plan
At the previous meeting, Christine Lagarde stated that the European Central Bank was in a strong position. Meanwhile, it will unlikely reveal its intentions and provide insights regarding future rates. However, the ECB's July meeting could present an opportunity to take profits on long trades in the EURUSD pair. In this regard, the euro's inability to break above 1.18 will generate a sell signal.
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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