The dollar's waning credibility may lead to reduced funding for the budget deficit, and its subsequent reduction could trigger a recession in the US economy. EURUSD bears are likely to suffer losses. Let's discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Divergence in monetary policy is not supporting the greenback.
- The ECB names the reason for the euro's strengthening.
- Fiscal policy is hurting the US dollar.
- Long trades on the EURUSD pair opened at 1.1065 and 1.1225 can be kept open.
Weekly US Dollar Fundamental Forecast
JP Morgan asserts that even in the event of a global recession, central banks are unlikely to be able to intervene effectively. They have become complacent and arrogant. After examining the trend of the EURUSD exchange rate, it is evident that the pair is moving in an upward direction, disregarding the divergence in monetary policy. This means that the uptrend is indeed unfolding. The recent return of Donald Trump to the US administration has prompted many market analysts to reevaluate fundamental analysis principles.
Historically, the US dollar pairs have been contingent on the accuracy of market predictions regarding the Fed's future actions. In April, markets expected four acts of monetary expansion in 2025, but by the end of May, the figure had been reduced to two. A month ago, the derivatives market was choosing between June and July as the date when the central bank would resume the cycle. However, those projections have now changed, and now the market does not expect this to happen before September.
The Fed concurs with this assessment. According to New York Fed President John Williams, the regulator is unlikely to grasp the situation fully in June or July. It will require time to determine the appropriate course of action.
Conversely, the European Commission's downward revision of its European inflation forecast to 2% in 2025 and 1.7% due to the influx of affordable goods from China, the strengthening of the euro, and weak domestic demand should, in theory, accelerate the ECB's monetary expansion process and exert pressure on the EURUSD pair. In fact, this is not the case. The decline in the major currency pair presents an opportunity for speculators to purchase the euro at reduced prices.
Eurozone Inflation Expectations
Source: Bloomberg.
The head of the European Central Bank attributes the upward trend of the EURUSD pair to investors' loss of confidence in the US dollar. Deutsche Bank is developing a new concept to demonstrate that the USD index will inevitably decline.
In contrast to the Dollar Smile Theory, the Dollar Fiscal Frown Theory has emerged. If Washington continues to pursue its stimulative fiscal policy, it will encounter difficulties in placing the significant volume of Treasury bonds required for this. Due to the loss of confidence in the US currency, non-residents will lose interest in Treasuries, which will ultimately lead to a fall in the USD index.
Conversely, if Washington begins to tighten fiscal policy, this will lead to a recession in the US economy and force the Fed to aggressively cut rates. In essence, the US dollar is likely to weaken.
US Dollar Fiscal Frown Theory
Source: Bloomberg.
Trust is a delicate commodity; it is not easily gained but can be lost just as easily. I concur with the assessments put forth by both Christine Lagarde and Deutsche Bank on this matter. The weakening of the US dollar is irreversible as long as Donald Trump is the US president. The head of the US administration's views on devaluation do not oppose the concept.
Weekly EURUSD Trading Plan
Washington's policy is exerting significant pressure on EURUSD bears, propelling quotes towards 1.16 and 1.2. Long trades established at 1.1065 and 1.1225 can be maintained and increased on pullbacks.
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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