The US government is setting the stage for a greenback rally, calling it a strong dollar policy. However, you can lead a horse to water, but you cannot make it drink. The USD index may fall. Let’s discuss this topic and draw up a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The flight from other assets strengthened the greenback.
- A strong dollar policy and a strong dollar are not the same thing.
- The USD index will be tested by key reports.
- Long trades on the EUR/USD pair can be opened on a breakout of 1.1835.
Weekly US Dollar Fundamental Forecast
The US dollar posted solid gains in the first week of February. The stock market was rattled by AI-related concerns, while gold and Bitcoin plummeted, leaving investors with no choice but to seek refuge in safe-haven assets. US Treasuries and the greenback became the obvious choices. However, by the end of the five-day period, the situation had completely reversed, and EUR/USD bulls pushed the price higher.
US Dollar’s Weekly Performance
Source: Bloomberg.
The US dollar’s gains were partly fuelled by the unwinding of short positions. As of February 3, net shorts on the greenback had reached their highest level since July. Speculators were forced to close their positions as they searched for safe assets. However, bears on the greenback may return, as the US currency is about to face a tough test in the form of labor market and inflation reports.
Speculative Positions On US Dollar
Source: Bloomberg.
Bloomberg analysts expect consumer prices to slow to 2.5%, unemployment to 4.4%, and employment growth to 69,000. However, there is a risk that previous non-farm payrolls will be revised downward. This could shift the Fed’s expected rate cuts from June to April, which would weaken the US dollar.
The labor market is crippling. Hiring is at its slowest pace since 2003, excluding the 2008–2009 global economic crisis and the 2020 pandemic. Tariffs are forcing companies to optimize costs and cut jobs. AI is exacerbating the situation. The same is true of still-high interest rates. When you add in employees’ desire to cling to their jobs, the slowdown in employment seems like a logical outcome.
The Fed has already cut rates three times preemptively to throw a lifeline to the labor market. However, if it continues to cool, the central bank will have no choice but to resume the cycle. This is bad news for the greenback.
Scott Bessent’s statement that there was no contradiction between his rhetoric and the US president’s words put pressure on the US dollar. At the end of January, Donald Trump welcomed the drop in the USD index. The Treasury Secretary, however, was talking about a strong dollar policy. The Treasury Secretary noted that the strong dollar policy aimed to create a strong backdrop for the US currency, including tax, trade, deregulation, and energy policies. Another question is whether the greenback will benefit from these policies.
Weekly EURUSD Trading Plan
The tailwind for the US dollar has turned into a headwind, and concerns about the weakness of the labor market are allowing the EUR/USD pair to gain ground. Long positions can be considered on a breakout of the resistance level of 1.1835. Alternatively, it would be better to remain on the sidelines until the publication of important economic data.
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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