EUR/USD Exchange Rate: Potential for Further Decline Amid Diverging Policies

USD Outlook: The Role of Domestic Policies and Global Trade Dynamics

The outlook for the U.S. dollar (USD) is heavily shaped by domestic policies, particularly those emphasizing tariffs, tax cuts, and deregulation under the Trump administration. Most likely this focus on protective tariffs could increase import costs for the U.S., exerting pressure on foreign economies while potentially incentivizing U.S.-based production. At the same time, measures such as easing regulations for businesses and offering tax incentives are expected to strengthen domestic industries, which could add momentum to the USD. However, a stronger dollar is not a foregone conclusion. Reactions from global markets and countermeasures by other governments could offset these U.S. policies, leading to a more balanced currency outcome. On yesterday's blog, I’ve covered DXY reaching 106 level as my target point, and that trade was right on point you can access the blog click on here: Trump 2024 Victory Drives USD Higher

DXY Chart H4 

 Source: TradingViewRecent volatility in the USD has highlighted market sensitivity to policy uncertainties. A rise in profit-taking in several currency pairs, a reflection of traders’ cautious approach to the unpredictable trajectory of tariffs and other economic measures. This pattern suggests that while some expect short-term gains in the USD, there is hesitancy given the possibility of rapid shifts in trade policies. In response to potential U.S. economic moves, other nations may take strong fiscal actions. China, for example, could introduce further stimulus, while Germany may contemplate fiscal expansion, both of which could mitigate the effects of U.S. policies on the USD. While U.S. domestic measures lean toward strengthening the USD, these potential international responses might reduce the overall impact, underscoring the complexity of the dollar’s outlook.

EUR Outlook: Economic Pressures and Policy Challenges for the Euro

The outlook for the Euro (EUR) is clouded by economic challenges and policy uncertainties across the Eurozone. GDP growth forecast for the Eurozone, estimating a 0.5% contraction due to mounting trade tensions and potential spillover effects from global economic policies. To address this economic drag, I’m anticipating that the European Central Bank (ECB) may pursue further rate cuts as a stimulus measure, which would likely exert downward pressure on the Euro.

ECB Interest Rate Probability 

 Source: Primemarket TerminalTrade policies, even those primarily targeting China, could still indirectly impact the Eurozone. As the U.S. considers interest rate hikes to counter inflation, the ECB may lean toward rate cuts to stimulate the struggling Eurozone economy, amplifying the divergence between U.S. and Eurozone monetary policies. This split in policy direction may lead to a weaker Euro, as the growing interest rate gap makes the currency less attractive to investors. Should U.S. tariffs and inflation continue to rise, you can check how the inflation is shaping the USD on this blog I’ve done: USA CPI to be higher, the EUR/USD exchange rate could drop by as much as 3%, potentially even approaching parity. This scenario is likely to play out if U.S. inflation and interest rates outpace those of the Eurozone, where economic stimulus and a declining interest rate differential might amplify pressure on the Euro.

The widening interest rate gap between the U.S. and Eurozone as a central driver for potential shifts in the EUR/USD exchange rate. With U.S. inflation possibly spurring further rate hikes and the Eurozone moving in the opposite direction, this divergence could strengthen the USD relative to the Euro, potentially pushing the EUR/USD exchange rate closer to or even below parity (1:1).

EURUSD Daily Chart 

 Source: Finlogix ChartsRisk factors and policy timing will play a key role in determining the extent of this movement. Should inflation rise significantly in the U.S. due to increased tariffs, the Federal Reserve may respond with rate hikes to control inflationary pressures. Conversely, if European fiscal policy fails to sufficiently support economic growth, the ECB may adopt a more aggressive rate-cutting strategy, intensifying downward pressure on the Euro. Looking further ahead, forthcoming 2025 outlook will incorporate the intricate interplay between these monetary policies and the broader global fiscal response. Although short-term forecasts lean toward a stronger USD, the long-term trajectory may evolve with ongoing policy developments.

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