Euro-to-Dollar Forecast for the Week Ahead: Falling out of Bed

U.S. Commerce Secretary Scott Bessent announces detailed outcomes of weekend talks in Geneva. Image © Pound Sterling Live.

The Euro has been undermined by positive news on U.S.-China Trade.

The Euro to Dollar exchange rate (EUR/USD) fell out of bed on Monday morning after markets awoke to news of a U.S. capitulation on trade with China.

Commentators will report that the U.S. and China reached a 'deal', but such a term is mere window dressing for what is, in effect, a full surrender by the U.S.

The headlines are that for the next 90 days, the combined 145% U.S. tariff on most Chinese imports will be reduced to 30%, meaning the tariff rate tied to fentanyl remains, while the 125% Chinese duties on U.S. goods will drop to 10%.

"Huge win for China if confirmed. This takes the tariffs back close to pre-Liberation Day levels. Markets will ignore the 90-day Damoclesian window, as it is clear that neither side has the stomach for the economic pain," says Simon French, Chief Economist at Panmure Liberum.

A reset in trade settings to pre-'Liberation Day' levels would demand a reset in FX markets to similar levels. Given that the Dollar has suffered greatly under Donald Trump's trade realignment efforts, it therefore stands to benefit from a reset.

"A de-escalation in tariffs is constructive for U.S. assets," says Kenneth Broux, a strategist at Société Générale.

To be sure, a full retracement of 2025's losses is unlikely, as some premium will surely remain; however, further gains followed by a period of consolidation are now visible.

For Euro-Dollar, this could suggest the 2025 peak won't be bothered again anytime soon, even if there is a decent chance the trend higher does resume at some point in the coming months.

For the week ahead, further EUR/USD weakness is possible, but we won't preclude a brief bounce from Monday's lows at 1.1080 and reconvergence with the nine-day exponential moving average (EMA) at 1.1260.

Above: EUR/USD at daily intervals showing momentum to the downside is growing.

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"EUR/USD has now failed at both immediate support levels (1.1274/76 and the 1.1214 line), which creates room for a deeper correction back towards 1.10. The market would have another opportunity to put in a base there, although the risk, if that area cracks, would be for a drop back down into the March ranges," says Nick Kennedy, FX Strategist at Lloyds Bank.

The Dollar has fallen significantly this year as U.S. economic exceptionalism gave way to a 'Sell America' trade as markets feared a sharp slowdown in economic activity as tariffs bit.

As the 'Sell America' trade fades, so the Dollar can refind its feet.

"While both US and Chinese officials had signalled a positive outcome from the Geneva negotiations already on Sunday, the cuts to tariff rates were larger than we had anticipated," says Antti Ilvonen, Senior Analyst for the U.S. at Danske Bank. "After today’s announcements, the expected negative impact on US GDP could be nearly halved to only around 0.5%."

"We believe the Trump administration changing its tariff stance in response to equity and bond market turbulence indicates some sensitivity to market stress," says Kurt Reiman at the Chief Investment Office at UBS Global Wealth Management.

However, some analysts warn that much damage has been done and the Dollar has entered a multi-year trend of depreciation, arguably something Donald Trump has tried to engineer from the start, as it makes U.S. exports more competitive.

"The premium valuation for the USD can continue to erode. The multiyear trend towards dollar strength has broken and I can see material further weakness from here," says Josh Schiffrin, Chief Strategy Officer at Goldman Sachs' Global Banking & Markets division.

If this view is correct, then the setback to Euro-Dollar will ultimately prove temporary. But for the coming days, downside is favoured as a significant build up in short positions are unwound and momemtum followers pursue cheap Dollars.