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22.05.2025 12:05 AM
The Dollar Sawed Off the Branch It Was Sitting On

Can the euro be considered a strong currency? I have significant doubts about that. An independent group of economic advisors to Friedrich Merz forecasts that the German economy will enter a period of stagnation following two years of recession. European Central Bank Vice President Luis de Guindos states that the deposit rate will fall to the neutral level sooner rather than later. Europe is on the verge of a trade war and will likely lose. These factors should terrify EUR/USD bulls, but the opposite is happening. They're confidently going on the offensive. And they're winning.

Germany's Economic Performance and Forecasts

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The reasons are not found in Europe, but rather in North America. After the U.S.–China truce, investors believed that the era of trade conflicts was over. They no longer expect an extension of the 90-day reprieve, assuming tariffs remain low. And just as markets settled into that expectation, the downgrade of the U.S. credit rating drew attention to a completely different issue—fiscal policy.

Former U.S. Treasury Secretary Steven Mnuchin doesn't see problems with the trade deficit but does see trouble with the budget deficit. It's not hard to understand why. Moody's downgraded the U.S. rating before the congressional battle over Donald Trump's fiscal stimulus plan. Yes, Republicans outnumber Democrats in Congress, but they are divided. If the necessary votes cannot be secured, it will deal another blow to the U.S. dollar.

The fact that the dollar has lost its status as the world's primary safe-haven asset is undeniable. What matters more is what that signifies. It indicates a tectonic shift in capital flows. Capital moved from East to West for years, from the Old World to the New. But in 2025, the reverse process began. And that spells trouble for EUR/USD bears. No wonder the risks of a reversal in the USD index are at record lows, indicating the downtrend in the greenback is likely to continue.

Reversal Risk Dynamics for the U.S. Dollar

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Rumors that the U.S. will pressure G7 allies at the Canada summit to devalue the dollar are fueling the EUR/USD rally. South Korea has confirmed that currency discussions with Washington are ongoing, though no decisions have been made. Japan also plans to explore currency negotiation opportunities with the U.S. It's hard for investors not to recall the coordinated intervention after the 1985 Plaza Accord. There's no smoke without fire.

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Thus, no matter how weak the euro may be, structural shifts in the Forex market are allowing the main currency pair to move higher steadily.

Technical Outlook

Technically, the EUR/USD daily chart develops a 1-2-3 reversal pattern, indicating a revival of the uptrend. The bulls' first attempt to test resistance at 1.1355 (the fair value level) failed, but they aren't giving up. A successful retest could trigger an expansion of long positions opened from 1.1225.

Marek Petkovich,
Analytical expert of InstaForex
© 2007-2025
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