EUR/USD Outlook and Forecast End of the Bull Trend?

EUR/USD has been in a strong uptrend, but we now expect it to end and see it as a sell on rallies or on downside breakouts, our view of the fundamentals, sentiment, and key technical levels below

Fundamentals

The Euro is the second most liquid currency behind the USD and has been a major beneficiary of USD weakness:

In terms of the USD, we expect a major rally today, “Sees the release of the June US CPI figure. This is expected to start ticking back up to 0.3% month-on-month increases as the effects of tariffs finally start to show up, although the effects might be more sizeable in the July-September data than the June data. Still, the data has the potential to start removing the 17bp of easing priced in for the 17 September FOMC meeting and prove slightly positive for the dollar." (ING)

We agree and think a robust economy and a hawkish Fed will underpin the USD. In terms of tariffs, we dont see much downside for the USD: “We're in the thick of tariff headlines this week, yet the Dollar is holding up. Cast your mind back to April, when President Donald Trump unveiled his 'Liberation Day' tariffs, and you will recall that the Dollar plummeted. This begs the question: is the Dollar losing its sensitivity to tariff headlines?” (PSLIVE) The above is a good question, and Richard Cochinos, FX Strategist at RBC's Capital Markets division, outlines six reasons:

U.S. Tariffs were a legitimate surprise in April; now they are a refresh. Dollar positioning is radically different from that in April. U.S. short-end rates are paring back from four cuts (April) to two cuts expected by the end of 2025, keeping US$ hedging costs elevated. U.S. economic data has been positively surprising recently. U.S. Stocks are once again outperforming.

We agree broadly with the above notes. In terms of the US economy and interest rates, the June FOMC meeting minutes released this week confirmed that the cautious/hawkish front remains dominant in the FOMC, with only Waller and Bowman having explicitly moved to the dovish side. It is now a big driver, and the potential FX impact of next week’s CPI figures still looks much bigger than trade news.

In terms of a big tariff war, we don't see this coming at all. We expect a gradual implementation of sector-specific tariffs, which should do much less damage to the dollar compared to sudden, 'Liberation Day'-style measures. The US is the world's biggest consumer, and most countries will do a deal with the US. Most economies in the world are weaker than the US and, in our view, have a lot to lose if deals are not done. In conclusion, the US will get concessions from other countries, and an all-out tariff war will be avoided.

Speculative positioning built up over the last few months reflects speculators assuming an all-out tariff war, recession, and stagflation in the US. This bearish scenario won't come to fruition. Volatility is dropping in USD pairs, which warns of a big move, which we think will be to the upside as speculators get taken out of the market on stop.

The EUR has moved up mostly on USD weakness, not due to any big positive news from the eurozone. The bearish fundamentals in terms of the USD have peaked, and we now expect a broad-based USD rally.

Interest Rate Differentials

EUR/USD has moved too far too quickly against interest rate differentials.

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