The world's largest economy and most liquid capital markets gave investors in US assets a sense of security. However, Donald Trump's policies destroyed this foundation. Let's discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- Donald Trump's bizarre ideas are scaring investors.
- Polymarket does not believe in the introduction of new tariffs.
- The baseline scenario suggests that Europe will retreat.
- Long trades can be considered as long as the EUR/USD pair is trading above 1.17.
Weekly US Dollar Fundamental Forecast
The "Sell America" trade is in full swing! The Nasdaq Composite index has posted its worst daily performance since October, 10-year Treasury yields have soared to their highest levels since August, and the US dollar has been selling off across the board. The EUR/USD pair has recovered all of its January losses in two days. Could it have been any different? For decades, the United States has been perceived as a beacon of security. Under Donald Trump, the country has descended into turmoil.
For the first time in the Federal Reserve's 119-year history, the US leader has decided to dismiss the FOMC governor. Before his trip to Davos, Donald Trump posted a star-spangled banner over Greenland, Venezuela, and Canada on social media. He wants to replace the UN with his "Board of Peace" and is threatening France, which does not want to join it, with tariffs.
Major US Trading Partners
Source: Wall Street Journal.
Import duties are being used as a form of coercion to achieve the US administration's goals. While EU countries are debating whether to launch a counter-coercion mechanism, US Treasury Secretary Scott Bessent is urging them to remain calm and refrain from retaliation. If they behave as they did after Liberation Day in America, everything will be fine.
The option that Europe will back down is the most likely, according to Polymarket. It sees a 37% chance that by February 1, the US will impose tariffs on at least one European country on the list. The chances that all eight countries will be targeted are estimated at 17%. Just as in April, the EU is showing its determination at the beginning of the conflict, but will most likely take a step back. The bloc is definitely divided. Why should Italy support retaliatory measures if no one is threatening it? Why should Poland fight the United States, putting itself at risk of losing the American military umbrella?
According to UBS, Europe will never dare to use the $10 trillion weapon of capital that Deutsche Bank has mentioned. The US is the world's largest economy, and its stock and bond markets are the most liquid and largest. Large-scale asset diversification would result in huge losses.
US Dollar Volatility Index
Source: Bloomberg.
Europe will either back down and give up Greenland or retaliate on a small scale, hoping to de-escalate the conflict. Much will become clear in Davos, but until then, tensions are likely to mount. Meanwhile, the US dollar is facing elevated volatility, which is one of the reasons why investors are selling it off.
Weekly EURUSD Trading Plan
Against a looming US-Europe trade war and the risk of Lisa Cook being dismissed by the US president from her position as FOMC governor, the EUR/USD pair's uptrend seems quite natural. While the main currency pair trades above 1.17, long positions opened at 1.1615 and 1.168 can be maintained.
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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