US Dollar Edges Higher as Markets Assess Trade Tensions. Forecast as of 13.03.2025
The US dollar rate has factored in a significant amount of negative factors. Investors are concerned about a looming recession, which is still a distant possibility. In contrast, the euro has no fear in the face of trade wars. Let’s discuss these topics and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- The US-EU trade war has begun.
- The US economy is far from recession.
- Euphoria in Germany is off the charts.
- Short trades can be opened with targets at 1.0825 and 1.0715.
Weekly US Dollar Fundamental Forecast
According to the US President, the EU’s decision to respond to the tariffs on steel and aluminum with its own levies on imports of American goods for €26 billion indicates a pattern of “an eye for an eye, a tooth for a tooth.” According to Donald Trump, the EU’s formation was intended to exploit the US. The trade war is beginning, but the EURUSD exchange rate is not showing immediate signs of response.
The rapid appreciation of the euro against the US dollar has prompted banks and investment firms to re-evaluate their forecasts. For instance, UBS, which previously anticipated a parity in the primary currency pair in January, now forecasts growth to 1.12 by the end of the year. The primary factors contributing to this shift include President Trump’s commitment to addressing the recession in the US, Europe’s fiscal stimulus measures, and the unexpected developments in trade relations between Washington and Ottawa.
Meanwhile, Nordea views the potential for a EURUSD rally as constrained, forecasting a decline to 1.04 within three months due to the ongoing trade tensions. The return of the previous narrative is a possibility if Donald Trump implements fiscal stimulus, which would support the US economy while tariffs would slow its rivals. The recent US inflation data for February may signal the beginning of this process.
US Inflation Rate
Source: Wall Street Journal.
At first glance, the slowdown in consumer prices and core indicators to 0.2% m/m enabled the EURUSD pair to remain resilient. The likelihood of the Fed resuming its monetary expansion cycle in May increased, and the US dollar faced another headwind. However, markets suggest that subsequent tariffs imposed by the White House may accelerate CPI and PCE. These tariffs have not yet been factored into market expectations, allowing the disinflationary trend to develop. The upcoming data in March and April will provide further insights into the market’s response.
Current projections are uncertain. This uncertainty is particularly pronounced in light of the mercurial nature of Donald Trump’s policies. While during his first term, investors were uncertain about which tariffs would be repealed and which would not, they now admit that short-term pain is a means to achieve the “Make America Great Again” agenda.
While markets believe that this acute pain is a clear sign of a recession, it is premature to discuss a downturn in the US economy. US dollar quotes are overly bearish. Conversely, the euro has shown remarkable optimism, with investors anticipating a substantial positive impact from fiscal stimulus on German GDP. However, this will take time to materialize, as the German constitution has not yet undergone the necessary amendments.
Weekly EURUSD Trading Plan
When considering the ongoing trade war, where the European Union is a clear loser, the odds of a correction in the EURUSD pair are growing. Thus, consider short positions, adding them to the short trades opened at 1.089, with targets at 1.0825 and 1.0715.
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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