EUR/USD Weekly Forecast: US Dollar to Keep Suffering from Trade War Woes
Key Takeaways:
- The European Commission and Germany are planning to boost defense investment.
- President Trump's trade war continues to cause global economic uncertainty.
- The EUR/USD pair may continue its rally towards the 1.1000 psychological level.
The EUR/USD pair has reached levels unseen since last November, settling near 1.0888, its Friday high. The US Dollar (USD) is weakening due to disappointing US data and concerns that President Trump's tariffs will negatively impact the economy.
Germany's Plan to Strengthen EU Defense
Recent news from Germany has supported the Euro (EUR). The upcoming Chancellor, Friedrich Merz, has proposed increasing spending on both military and infrastructure while encouraging the European Union (EU) to do the same. Merz plans to create a special fund of €500 billion to support infrastructure projects outside the regular budget over the next decade.
This decision comes after President Trump threatened to withdraw support for Kyiv, which he enacted by freezing aid to Ukraine. Furthermore, European Commission President Ursula Von der Leyen has announced a plan to gather about 800 billion EUR to bolster Europe's defense and provide immediate military aid to Ukraine, following Washington's aid suspension. The EU plans to issue bonds and relax regulations to gather these funds.
ECB's Monetary Policy Decision
The European Central Bank (ECB) announced its monetary policy decision, cutting the three key benchmark rates by 25 basis points (bps) each. The deposit facility rate, main refinancing operations rate, and marginal lending facility rate are now at 2.50%, 2.65%, and 2.90%, respectively. ECB President Christine Lagarde noted that policymakers remain data-dependent and suggested the possibility of keeping rates steady, which further strengthened the EUR.
Lagarde also commented that the ECB Governing Council anticipates that the proposed spending plans by Germany and the European Commission will stimulate the EU economy.
US Dollar and Trump's Policies
The US Dollar has weakened as President Trump engages in trade disputes with Canada and Mexico. The US government initially imposed 25% tariffs on imports from both countries but reversed these measures shortly after. Concerns regarding the impact of tariffs on US economic growth and inflation have contributed to the Dollar's decline.
Macroeconomic Data Overview
Throughout the week, focus was on growth and employment data from the US. The Hamburg Commercial Bank (HCOB) and S&P Global released final estimates for the February Purchasing Managers’ Index (PMI). Manufacturing output in the EU and US was revised upward. The US official ISM Manufacturing PMI decreased to 50.3 in February, while the ISM services index rose to 53.4.
US employment data indicated the private sector added only 77,000 new jobs in February, below expectations. Additionally, the Nonfarm Payrolls (NFP) report indicated an increase of 151,000 new jobs in February, also below the anticipated 160,000. The Unemployment Rate increased to 4.1% from 4% in January. This tepid data has kept the US Dollar weak.
Upcoming Economic Events
In the coming days, US and Ukrainian officials will meet in Saudi Arabia to discuss a framework for ending the Russia-Ukraine war. Data-wise, the US will release the February Consumer Price Index (CPI) and Producer Price Index (PPI). Germany will also release the final estimate of the February Harmonized Index of Consumer Prices (HICP).
EUR/USD Technical Analysis
The EUR/USD pair has increased by approximately 460 pips in the last week. Technical analysis suggests potential for further advances, especially if the pair surpasses the 200 Simple Moving Average (SMA). The daily chart indicates the pair is overbought but may continue to rally before a correction.
Key Technical Levels:
- Immediate Support: 1.0800
- Dynamic Support: 200-day SMA around 1.0725
- Potential Resistance: 1.1000 psychological mark, 1.1080 region
Tariffs FAQs
Here are some frequently asked questions about tariffs:
| Question | Answer |
|---|---|
| What are tariffs? | Customs duties levied on merchandise imports to help local producers compete. |
| What is the difference between taxes and tariffs? | Tariffs are prepaid at entry, while taxes are paid at the time of purchase. |
| Are tariffs good or bad? | Debated among economists; some view them as protective, others as potentially harmful. |
| What is US President Trump's tariff plan? | To use tariffs to support the US economy, focusing on imports from Mexico, China, and Canada. |