What is better for the euro: the decline of U.S. economic and dollar supremacy or a "Sputnik moment" in Germany? Berlin's refusal to use the fiscal brake resembles launching a rocket into space. Coupled with concerns about a U.S. recession, this has pushed the EUR/USD exchange rate above 1.090. The last time this major currency pair reached these levels was during the U.S. presidential elections in early November. Donald Trump's unpredictable behavior caused investors to turn away from the American president.
In March, the USD index dropped by more than 2.5%, marking its worst performance since late 2023. At that time, the Federal Reserve announced a dovish pivot, prompting financial markets to begin preparing for a rate cut. However, the acceleration of U.S. inflation in the first quarter of 2024 delayed the start of monetary easing until September, allowing the U.S. dollar to strengthen and set the stage for a competitive advantage in the G10 currency race.
US Dollar Index Monthly Dynamics
Trump made this victory possible for the dollar. He made grand promises to return to the White House, and investors believed him. His fiscal stimulus was supposed to supercharge an already strong U.S. economy, while tariffs would further slow down the rest of the world. The divergence in economic growth was expected to send the dollar soaring. But dreams often differ from reality.
Tariffs and mass layoffs in the public sector risk slowing GDP rather than accelerating it, as indicated by the Atlanta Fed's leading indicator. No matter how much Trump talks about a golden era for the U.S., investors are losing confidence in American assets. The capital outflow from U.S. stocks signals the loss of American exceptionalism. Money flows elsewhere—to Europe, Asia, or even into U.S. Treasury bonds, which lowers yields and weakens the dollar even further.
US Stock and Bond Yield Performance
Euphoria continues to dominate in Germany; however, Friedrich Merz's struggles raise an important question: where are you rushing to, EUR/USD enthusiasts? The Green Party, which is essential for any amendment to the Constitution, has strongly rejected the initiative proposed by Germany's almost-chancellor. Additionally, representatives from both the left and the Alternative for Germany party have filed lawsuits against the CDU's plan to increase defense spending.
Nonetheless, judging by the movement of the major currency pair, investors firmly believe that Merz will succeed. Caution will give way to fiscal largesse, and the euro will soar to $1.200.
Technically, on the daily EUR/USD chart, an inside bar pattern has played out, allowing long positions to form just below 1.087. If the bulls break through the resistance zone at 1.091-1.093, the risk of the rally continuing toward 1.102 and 1.115 will increase. In such conditions, holding long positions on the euro against the U.S. dollar makes sense.
