EUR/USD is rising, trading at about 1.1390 during Monday’s Asian session. This boost comes after US President Donald Trump extended the deadline for a 50% tariff on EU imports to July 9. Ursula von der Leyen, President of the European Commission, indicated the EU’s willingness to negotiate, although a final deal still needs time. Meanwhile, US markets are closed for Memorial Day. On Friday, Trump warned about potential 50% tariffs on EU imports, criticizing Brussels’ trade proposal and suggesting these tariffs could start on June 1, 2025, due to stalled negotiations. The currency pair is also benefiting from a weaker US Dollar, as ongoing economic uncertainties continue. Trump’s proposed bill could increase the fiscal deficit and impact bond yields and borrowing costs.

US Economic Outlook Concerns

The economic outlook for the US looks shaky. Moody’s has downgraded the US credit rating from Aaa to Aa1, predicting that federal debt could rise to 134% of GDP by 2035, up from 98% in 2023, with a budget deficit approaching 9% of GDP. Federal Reserve officials, worried about Trump’s tariff threats, seem reluctant to change interest rates. Chicago Fed President Austan Goolsbee has suggested delaying any changes, while Kansas City Fed President Jeffrey Schmid advocates a data-driven approach. With EUR/USD around 1.1390, we see clear momentum influenced by recent political moves on both sides of the Atlantic. Trump’s decision to push the tariff deadline to early July brought short-term optimism to the currency pair. This pause suggests that negotiations are still alive, even if not resolved. Von der Leyen’s remarks show that Brussels is ready for talks, but the need for more time indicates that clear outcomes are still lacking. With the US on a market holiday, liquidity is lower, which could lead to more extreme price movements in the coming days. We should be cautious of sharp reversals in this low-volume environment, especially in early European trading. On Friday, Trump’s tariff threats led to a brief period of risk aversion, but markets have since adjusted. Traders are now more focused on the general weakness of the US Dollar, which is supporting the euro. If Trump’s proposed trade measures are enacted, they could widen the budgetary gaps in the US further, something that bond markets are closely monitoring. Rising deficits typically drive up yields, as the government must borrow more when rates are stable.

Federal Reserve and Market Sentiment

Adding to the tension, Moody’s has downgraded the US credit rating, highlighting long-term debt concerns. Though the downgrade from Aaa to Aa1 may not immediately affect capital flows, it confirms that debt is rising faster than revenue. They predict debt-to-GDP will exceed 130% in a decade, and with the deficit already at 9% of GDP, the US may need to reduce spending or increase revenue—options that seem politically unlikely before the election. Goolsbee from the Chicago Fed appears cautious about adjusting monetary policy too quickly, pointing to mixed signals in domestic data and trade tensions. Schmid echoes this caution, insisting that any policy actions must rely on incoming data. This suggests that policy will remain stable in the near term rather than become more accommodative, especially as inflation remains persistent. Traders may benefit more from focusing on high-frequency data like CPI, job reports, and real yields over the next two weeks, rather than relying too much on central bank guidance. The price action of EUR/USD will depend on whether interest rate expectations change based on new data. From a position management perspective, we prefer strategies that reflect sideways trading in the short term, with a potential upside if risk appetite improves and US yields stay steady. Keep an eye on German and French economic data this week. If those reports fall short, they could halt the euro’s rise, but likely won’t trigger a major reversal. We need to stay alert to any headlines from Washington or Brussels—unexpected policy changes could affect our strategies. Avoid passive exposure near critical technical levels unless confirmed by significant volume or strong directional movements. Keep tight stops in place—it’s too risky to rely on outdated correlations. Create your live VT Markets account and start trading now.

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