Confidence in the dollar enables the US to attract capital inflows and avoid budget woes like those in the UK. However, the US administration is undermining this confidence. How might this affect the EUR/USD pair? Let's discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The US has more debt than the UK.
- The US dollar ensures financial security for Americans.
- Eroding confidence in the greenback is putting pressure on the USD index.
- Long positions on the EUR/USD pair can be considered on a breakout of 1.161.
Weekly US Dollar Fundamental Forecast
If the CME system outage failed to help the US dollar, then the greenback is doomed. The US currency recovered slightly amid problems with the electronic trading system, but the fundamental backdrop cannot be ignored. The divergence in monetary policy, the narrowing of the economic growth gap, and the undermining of confidence in the greenback due to US policies will allow the EUR/USD pair to continue its rally. Yet, bears' troubles do not end there.
The difficulties with the UK budget inevitably raise the question: could something similar happen in the United States? The UK's national debt will reach 95% of GDP in 2025, and the budget deficit will reach 4.3%. For the US, these figures are even higher – almost 100% and 7%. London faces a trilemma: how to appeal to creditors and voters without damaging the economy. Is Washington not in danger of facing the same scenario?
Developed Countries' Public Debt
Source: Wall Street Journal.
First of all, the US can afford to increase taxes, as they are lower than in the UK. Secondly, the demand for the dollar protects the country. It is the currency in which the assets of the world's largest and most liquid securities markets are denominated. As long as the greenback retains its status as the primary reserve asset and confidence in it remains high, the United States has nothing to worry about.
The US continues to talk about a strong dollar, although it hopes for its weakening. At the same time, the undermined confidence in the US currency deals a blow to EUR/USD bears. It requires sound relations with trading partners to ensure high demand for Treasuries and stocks. However, tariffs are unlikely to improve these relations. The freezing of Russia's gold and foreign exchange reserves has not helped the greenback either. It has only spurred de-dollarization and diversification of reserves.
Substantial budget and current account deficits require large-scale issuance of Treasury bonds and increase the supply of US dollars. This is a systemic, long-term process of weakening the greenback, which is exacerbated by the risks of the Fed becoming a proxy for the Trump administration. Donald Trump has stated that he has already selected a new Fed chair, and markets have no doubt that it will be confirmed dove Kevin Hassett.
EU Inflation Rate
Source: Bloomberg.
In contrast to the ECB, the Fed will likely lower interest rates. The ECB is comfortable with the current rate. Christine Lagarde said that rates were at the right level and inflation had been brought under control. However, the acceleration of consumer prices in Germany to 2.6% in November may fuel speculation about a tightening of monetary policy. Fiscal stimulus and expectations of higher wholesale prices may spur the CPI.
Weekly EURUSD Trading Plan
Against this backdrop, the EUR/USD pair will likely continue its rally. Long positions can be considered on a breakout of 1.161.
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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