Greenback Plunges Amid Deteriorating US Fiscal Outlook. Forecast as of 22.05.2025
The bond market has demonstrated its influence in the political arena, playing a role in the approval of Donald Trump’s tax cut bill. However, the outcome is not certain, as the Republican Party is divided on the matter. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- Soaring US bond yields have brought fear to the markets.
- The US administration is facing a string of failures.
- Without support from stock indices, the US dollar is in trouble.
- Buying the EURUSD pair with the target at 1.16 and 1.2 is a relevant strategy.
Weekly US Dollar Fundamental Forecast
If the markets are not concerned about the trade war, they will certainly be worried about the fiscal problems in the US. The recent Moody’s downgrade of the US credit rating appeared to have minimal impact on investor sentiment. This event prompted a closer examination of the debt market and the ambitious initiative being developed by US President Donald Trump to extend tax cuts. The picture is not as favorable for the US administration and EURUSD bears pair as they might hope.
As former US Treasury Secretary Steven Mnuchin accurately observed, the significant foreign trade deficit is not the primary concern; the budget deficit is the key issue. The Congressional Budget Office predicts that the Republican bill will increase the deficit to 7% of GDP, an unprecedented level for an economy with low unemployment, except during wartime. An increase in bond issuance will be necessary, but a question remains regarding potential buyers.
Trade wars and a reduction in foreign trade surpluses with the US due to tariffs are causing other countries to become less enthusiastic about US government debt, and investors will undoubtedly demand higher yields. This will increase debt servicing costs and slow down the economy at the same time. As expected, weak demand at the auction for 20-year Treasuries caused significant market turbulence. Yields on 30-year securities reached their highest levels since 2023, while stock indices plummeted, with the US dollar following suit.
US 30-Year Treasury Bond Yield
Source: Bloomberg.
It appears that the US administration’s strategic initiatives are facing significant challenges. Scott Bessent’s proposal, which includes a 3-3-3 plan aimed at increasing GDP to 3%, boosting oil production by 3 million bpd, and reducing the deficit to 3%, has been met with skepticism. A close examination of Donald Trump’s recent remarks reveals a questionable assertion that the economy is in decline, along with a call for the Fed to lower interest rates. Treasury bond yields are rising rapidly. In addition, the schism within the Republican Party over the new bill is compelling the president to address the party with a sense of urgency.
The bond market has once again demonstrated its influence in Congress’s deliberations on President Donald Trump’s initiatives. The rise in Treasury yields is not driven by the strength of the economy, but rather by concerns regarding budget deficits and the resurgence of inflation. Concerns about weak demand for bonds from overseas and the rally in bond yields in other countries, such as Japan and Germany, are also driving these changes.
Weekly EURUSD Trading Plan
For the EURUSD pair, it is important that stock indices have finally begun to respond to the US debt market shifts. As previously mentioned, the US dollar’s strength is primarily driven by the S&P 500 rally. Once the bubble bursts, the greenback will face significant headwinds. The major currency pair is approaching its bullish targets at 1.16 and 1.2, so long trades can be kept open and increased periodically.
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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