Weekly US Dollar Fundamental Forecast
The Washington Post’s January 6 report has set the stage for the year ahead. The EURUSD pair is projected to reach parity, but the path may be turbulent due to new speculation about the President-elect’s team preparing a plan to impose tariffs of 2-5% per month. This has led to a significant decline in the net long position held by speculators, a development that has not been seen since 2019.
US Dollar Performance and Speculative Positions
While inflation dominated the Forex market in 2022 and early 2024, investors shifted their focus at the end of last year to the weakness of the labor market. Subsequent data confirming its strength prompted hedge funds and asset managers to reallocate capital. Speculators are attempting to anticipate the trajectory of consumer prices, and Donald Trump’s policies are a key link.
According to Trump’s team, gradual tariffs will not spur inflation as much as if the US imposes 60% duties on Chinese imports and 10–20% on the rest of the world. If CPI and PCE do not accelerate, the Fed can resume the monetary expansion cycle, which will weaken the US dollar. This is why the EURUSD responded so strongly to insights from the Washington Post and Bloomberg. The Commonwealth Bank of Australia has stated that if President Donald Trump does not refute the information on social media, as he did in the past regarding the events of a week ago, the US dollar may weaken further.
Despite this, the idea of a continuation of the downtrend in the EURUSD remains a valid one on Wall Street. Goldman Sachs forecasts the greenback to strengthen by 5% in 2025 thanks to US exceptionalism and slowing GDP growth outside the US due to tariffs. The forecast indicates a six-month outlook of 0.97 for the euro. Meanwhile, Deutsche Bank estimates the major currency pair will fluctuate within the 0.95–1.05 range this year.
There are multiple paths to parity, including a relentless fall, as witnessed in the fourth quarter, or a significant pullback. The primary factor influencing this outlook is the Donald Trump administration’s attempt to achieve the seemingly impossible: implement tariffs in the desired volume while also slowing inflation.
US Inflation Change
The efficacy of a phased introduction of duties in addressing the issue remains uncertain. According to Citi, such an approach is expected to trigger a series of supply shocks, leading to numerous disruptions in the supply chain. This approach is predicted to be more pro-inflationary than an immediate 10–60% tariff hike. In contrast, an immediate tariff increase would result in a rapid surge in the CPI and PCE, but this effect would dissipate within a year.
Weekly EURUSD Trading Plan
I believe the EURUSD rate will exhibit sharp spikes in 2025. However, US inflation will not be curbed, and the Fed’s monetary expansion cycle may conclude earlier than anticipated. If that occurs, one can open short positions on the EURUSD pair with the targets at 1.012 and 1.000.
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