EUR/USD: Trump complexifies the FED equation

The Euro/Dollar currency pair continues its sideways consolidation near $1.09, as traders grapple with an escalating trade war and a rather heated geopolitical context.

Regarding the Ukrainian issue, US President Donald Trump explained to reporters on Air Force One that "a lot of work was done over the weekend," as a 30-day truce plan was proposed and approved by the Americans and Ukrainians. He also spoke of "sharing certain assets," including "land" and "power plants." The Russians, for their part, are demanding "ironclad security guarantees" to implement this truce.

The euro's consolidation remains solid, supported by the now clear prospect of Germany breaking the fiscal golden rule. Future Chancellor Friedrich Merz has reached an agreement with the Greens that should allow the mega investment plan (around 900 billion euros) in defense and infrastructure to be adopted. With the support of Green MPs, the leader of the conservative party has the two-thirds majority needed to make constitutional changes and relax debt rules in Germany. This is a prerequisite for this plan to be implemented. The text will be put to a vote next Tuesday in the Bundestag, before being passed by the Bundesrat.

On the other hand, the dollar remains under pressure after a series of disappointing macroeconomic statistics, particularly on the consumer sentiment and consumption front. Another disappointment is the U-Mich consumer confidence index on Friday, which continued to decline, once again below expectations, at 58. Over the past year, the index has plunged by more than 26%. "Many consumers cited the high level of uncertainty surrounding policies and other economic factors; frequent fluctuations in economic policies make it very difficult for consumers to plan for the future, regardless of their political preferences," comments the Univ. of Michigan.

The Fed will have to deal with these signals as it convenes its Monetary Policy Committee this week. This task is made difficult by Trump's expansionary, anti-immigration, and aggressive tariff policies.

"Recent economic data have raised concerns among investors about the potential impact of Trump's policies on the economy," notes Claudia Panseri, Chief Investment Officer at UBS WM France. "The disconnect between Trump's aggressive trade stance and Commerce Secretary Howard Lutnick's more pragmatic approach, which is sometimes followed by concessions from the president, has complicated the administration's messaging. This lack of cohesion is creating uncertainty in financial markets and is likely to hamper investment decisions, as businesses and investors wonder whether Trump's policies will ultimately support or hinder economic momentum."

It is this lack of visibility into price and growth trajectories that complicates the equation. Dan Scott, Head of Multi-Asset at Vontobel, summarises the situation: "Fed members have stated that they are in a wait-and-see phase and need more visibility on the evolution of growth and inflation before cutting interest rates further. Or, in the words of Chicago Fed President Austan Goolsbee, 'There's a lot of uncertainty, a lot of dust in the air, and before the Fed can start cutting rates again, I think, and I've said, we need to clear some of that dust.' This "reactive" approach increases the risk of "falling behind," in other words, of not cutting interest rates quickly enough."

The asset manager hopes "that the Fed has learned from its past mistakes and is placing more weight on disappointing labor market data than on temporary increases in inflation."

Right now, the EUR/USD is trading at $1.0913.

KEY CHART ELEMENTS
The breakout of $1.0608 amid significant volatility is a game-changer for the currency pair's configuration, which has just validated a resumption of support on the long-term 50-day moving average (in orange), initiating a resource pattern. The scenario of a rapid decline towards perfect parity (1 euro = $1) is invalidated.

MEDIUM-TERM FORECAST
In light of the key chart factors we have mentioned, our medium-term opinion is neutral on the EUR/USD.