EUR/USD has extended its recent move higher on the back of more news reports that the EU and individual member states would be ramping up military spending. We believe that the outlook for EUR/USD could improve even further in the coming months. Firstly, the EU plans to step up its defence spending could both help domestic demand and boost long-term EGB real yields, thus attracting repatriation inflows back into the EUR. Secondly, a gradual withdrawal of the US could ultimately precipitate the end of the war in Ukraine in the coming months. A combination of a ‘peace dividend’ for Europe and reconstruction in Ukraine could further prop up the Eurozone outlook and support the appeal of EUR-assets. Thirdly, a potential rapprochement between the US and Russia could result in lower energy inflation and even grow into a positive supply shock for the economies of European manufacturing exporters, even if the EU sanctions against Russia remain in place for now.
In addition, a trade war between the US and Europe remains a key downside risk for EUR/USD. We expect the US to levy trade tariffs against the EU potentially as soon as April and this has been at least partially discounted by the markets, however. Lastly, the US economy could slow down further and force the Fed to resume its easing cycle in H225. The Fed may also have to put an end to its QT programme to accommodate President Donald Trump’s fiscal spending plans. This could erode the USD exceptionalism and trigger repatriation flows that could benefit the EUR.
On the day, while focus will remain on more headlines about fiscal commitments to rearm Europe ahead of the EU Council Summit tomorrow. In addition, the final services and composite Eurozone PMIs for February could attract some attention. In particular, evidence that the worst of the Eurozone economic downturn is behind us could corroborate the view that the ECB could deliver a ‘hawkish’ cut tomorrow, in yet another boost to the EUR.
In addition, a trade war between the US and Europe remains a key downside risk for EUR/USD. We expect the US to levy trade tariffs against the EU potentially as soon as April and this has been at least partially discounted by the markets, however. Lastly, the US economy could slow down further and force the Fed to resume its easing cycle in H225. The Fed may also have to put an end to its QT programme to accommodate President Donald Trump’s fiscal spending plans. This could erode the USD exceptionalism and trigger repatriation flows that could benefit the EUR.
On the day, while focus will remain on more headlines about fiscal commitments to rearm Europe ahead of the EU Council Summit tomorrow. In addition, the final services and composite Eurozone PMIs for February could attract some attention. In particular, evidence that the worst of the Eurozone economic downturn is behind us could corroborate the view that the ECB could deliver a ‘hawkish’ cut tomorrow, in yet another boost to the EUR.
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1. AccuTrade System:
tradingview.com/v/yDFPnb1J/
2. Signal Performance:
thedailyfx.com/performance/
3. We provide Free TradingView Premium and Essential Membership.
tradingview.com/v/yDFPnb1J/
2. Signal Performance:
thedailyfx.com/performance/
3. We provide Free TradingView Premium and Essential Membership.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.