Trive Bearish on EUR/USD
A second Trump term may strengthen the USD and weaken the EUR, especially with a Republican Congress. Proposed tariffs, supply chain restrictions, and potential tax cuts would drive dollar gains and boost U.S. inflation, while pressuring EUR/USD toward parity by 2025. This scenario could force the ECB to cut rates to support eurozone growth.
EUR: Under pressures
The EUR is facing increased bearish pressures amid rising political and economic uncertainties in Europe, particularly with turmoil within Germany’s coalition government. The recent dissolution of Germany's SPD-Greens-FDP coalition adds volatility as Germany now faces a likely snap election early next year, potentially destabilizing both domestic policy and market confidence. Polls indicate a potential shift toward a CDU/CSU-led government, though the ascent of the AfD could further shake investor sentiment, keeping EUR-assets under pressure. Adding to this, the divergence between U.S. and European economic policies is widening.
In the U.S., anticipated inflationary effects of new fiscal stimulus and tariffs under the Trump administration are likely to slow Fed easing, bolstering USD strength, while the ECB may continue cutting rates to support a Eurozone economy facing increased recession risk. Additionally, the shifting geopolitical landscape pressures Europe, as a potential reduction in U.S. support for the Ukraine war would force Europe to bear more economic responsibility, making the euro less appealing to international investors. The EUR/USD rate spread has tilted in favor of the USD, especially as new U.S. tariffs on EU imports are expected to weaken the eurozone’s growth outlook further. These factors together reinforce a bearish view on the EUR, with pressures mounting for a weaker EUR/USD as markets adjust to Europe’s unique economic and political headwinds.
On the data front, focus will be on the latest ZEW data out of Germany and the preliminary Q3 GDP data out of the Eurozone. Also of interest would be speeches by the ECB members as well as the release of the minutes from the October ECB meeting.
USD: ‘Trump Trades’ continuing
The USD outlook remains strong, supported largely by the “Trump trade” following Donald Trump’s election as U.S. President, with his fiscal stimulus and protectionist policies bolstering the currency.
Trump’s plans for increased government spending and tariffs are expected to drive inflationary pressures, potentially slowing the Fed’s rate-cutting pace and supporting the USD. The Fed has adopted a cautious, data-dependent approach, acknowledging elevated inflation and a steady, albeit slightly moderating, labor market. This economic resilience aligns with a "soft landing" scenario, where the U.S. economy can sustain growth without falling into recession, reinforcing USD strength.
As markets focus on upcoming U.S. CPI and retail sales data, along with commentary from Fed officials, investors are looking for confirmation of the “Trump trade” thesis. Barring any major shocks, Trump’s economic policies are likely to remain the USD’s primary driver in the near term.
EUR/USD 4H Chart
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