Given the current economic climate, with Germany immersed in a recession and political crises sweeping across Berlin and Paris, the only viable solution for the ECB is to cut the rate. Monetary expansion will weaken the euro, providing a boost to exports. Let’s discuss this topic and make a trading plan for the EURUSD pair.
The article covers the following subjects:
Major Takeaways
- Fears over tariffs are causing Americans to unleash their wallets.
- Accelerating GDP and inflation in the US will force the Fed to pause in January.
- ECB rate cuts are the only lifesaver for the eurozone.
- Short trades on the EURUSD pair can be opened on a rebound from 1.0525, 1.0585, or 1.0615.
Weekly Euro Fundamental Forecast
Adversity is a catalyst for growth and resilience. Despite the political crises in Germany and France, the recession of the German economy, and the ECB rate cuts, the EURUSD pair remained stable. The major currency pair demonstrated resilience and is poised to navigate potential challenges, including a vote of no confidence in the government of Olaf Scholz and indications of a slowdown in the Federal Reserve’s monetary expansion cycle in January. Will the euro demonstrate further fortitude in the face of future headwinds?
The prospect of rising inflation in the United States due to the implementation of tariffs by the Trump administration could prove to be a self-fulfilling prophecy. While businesses are considering how to cultivate a positive relationship with the new US administration, consumers are actively shopping for goods. A record-high percentage of Americans surveyed by the University of Michigan believe it is an opportune time to make significant purchases, up from 10%. According to a recent survey conducted by CreditCards.com, approximately one-third of respondents cited concerns about tariffs as a key factor influencing their purchasing decisions.
It is evident that consumer prices accelerated to 2.7% in November, and a leading indicator from the Atlanta Fed signaled 3.3% growth in US GDP in the fourth quarter. Given these figures, the Fed will likely implement fewer cuts to the federal funds rate in 2025 than was previously forecast in September. Bloomberg experts anticipate that there will be three such adjustments, scheduled for March, June, and September. As a result, the cost of borrowing will be reduced to 3.25%.
Fed Funds Rate Change Expectations
Source: Bloomberg.
The situation in Europe is quite distinct, leaving much to be desired. The German economy is on the brink of recession at a pivotal moment for the eurozone. The Bundesbank anticipates a 0.2% contraction in German GDP in 2024, marking the second consecutive decline. The forecast for 2025 has been revised from 1.1% to 0.2%. If President Trump imposes tariffs of 10% on the EU, the economy is projected to contract by 0.5%.
German GDP Forecast
Source: Bloomberg.
The situation is further complicated by the political crises in Berlin and Paris, which are slowing economic growth and forcing capital to flee Europe. Barclays has stated that the ECB is the only body capable of saving the eurozone. Its rate-cutting cycle is providing a glimmer of hope for the currency bloc, as it weakens the euro and thus helps exporters survive.
In the US, the economy is growing on expectations of Donald Trump’s tariffs, and inflation is accelerating, prompting the Fed to consider pausing its rate-cutting cycle. This is likely to result in a strengthening of the US dollar, making any correction in the euro an opportune time to open short trades on the EURUSD pair.
Weekly EURUSD Trading Plan
The EURUSD pair managed to stay above the previously mentioned support level of 1.0455, allowing bears to open short trades on a rebound from the resistance levels of 1.0525, 1.0585, or 1.0615. The trading strategy remains focused on a shift from short-term long positions to medium-term short trades.
Price chart of EURUSD in real time mode
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