The two pillars of American exceptionalism — immigration and fiscal stimulus — are history. Real treasury yields are falling. How can the U.S. dollar grow? For now, the S&P 500 is lending it a hand. Let’s discuss it and make a trading plan for EUR/USD.
The article covers the following subjects:
Major Takeaways
- The White House may soften car tariffs.
- The Treasury believes in extending fiscal stimulus.
- The U.S. dollar’s rate depends on capital flows.
- Pullbacks are opportunities to buy EUR/USD, targeting $1.16 and $1.195.
Monthly fundamental forecast for the dollar
While JP Morgan searches for a second wave of U.S. dollar weakening, EURUSD struggles to break above resistance at $1.14 amid a recovery in U.S. stock indices after an initial dip.
The White House continues to throw markets a lifeline by softening its tariff rhetoric and shifting its focus to fiscal stimulus. Stock indices are rising because investors believe someone — whether the Fed or Donald Trump — will always come to the rescue when they falter. Trump’s harsh statements about short-term pain for long-term prosperity, coupled with tariffs reaching their highest levels since the early 20th century, led to a crash in the S&P 500, accelerating capital flows from North America to Europe. This sank the greenback. Yet, subsequent events showed that the White House leader still has a soft spot for the stock market.
Speculative Positioning in Greenback
Source: Bloomberg.
Rumors that the White House may ease car tariffs, combined with Treasury Secretary Scott Bessent’s statement that Congress will resolve tax break extensions by July 4, have dampened EURUSD bulls. Still, J.P. Morgan, BNP Paribas, and Danske Bank expect the pair to hit $1.2 in 2025, while speculators have ramped up short positions on the greenback to their highest levels since September.
According to JP Morgan, which anticipates a second wave of dollar weakening, the main drivers of dollar growth — immigration and fiscal stimulus — are now in the past. Real treasury yields are dropping as tariffs fuel inflation. As a result, U.S.-issued assets are less attractive, leading to capital outflows and a decline in the USD index.
The market has quickly shifted from expecting EURUSD parity to forecasting $1.2, which could hurt the export-driven eurozone economy. During crises, the euro typically fell, supporting exporters and GDP. Now, it’s a different story. Barings suggests that deflation risks in the region may push the ECB to cut its deposit rate to 1.75%.
European Inflation Forecasts
Source: Bloomberg.
The European Central Bank expects White House tariffs to accelerate inflation growth rates by 0.7 percentage points in 2025, 0.4 percentage points in 2026, and 0.3 percentage points in 2027. Without trade wars, CPI would likely fall below the 2% target.
Monthly Trading Plan for EURUSD
In my view, Donald Trump’s aggressive tariffs have caused a significant shift in the Forex market. Exchange rates are no longer driven by central banks’ monetary policies. They depend on capital flows. The more the ECB cuts rates, the better it is for European stocks and the euro. Therefore, buying EUR/USD on pullbacks with targets at $1.16 and $1.195 remains a solid strategy.
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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