To predict the future, it's essential to examine the past. The behavior of the US dollar after the presidential elections in November is strikingly similar to its movements during the transition period of 2016-2017. At that time, the dollar strengthened until Trump's inauguration, after which it began to decline. The tariffs turned out to be less significant than he had promised, and the fiscal stimulus package faced challenges in passing through Congress. We are witnessing a similar situation unfold now.

Investors are growing weary of the rhetoric from the White House, which has proven to be less impactful than anticipated. The proposed tariffs on imports from Mexico and Canada have been postponed until March 1, and Trump now seems inclined to replace broad tariffs with targeted ones. Additionally, instead of implementing a 60% tariff on China, he has opted for a much lower rate of 10%. In 2017, actions like these led to an 8% decline in the USD index. Is history repeating itself?

Dynamics of the US Dollar

It's interesting to note that in 2018, the situation changed dramatically. The US President adopted a more aggressive stance, implementing tariffs on steel and aluminum, which subsequently led to a large-scale trade war with China. The outcome of this conflict seemed predetermined from the start. As a result, the US dollar staged a remarkable recovery. What direction will EUR/USD take now?

Conversations about parity in relation to the diverging economic growth between the US and the Eurozone, as well as the differing speeds of monetary expansion by the Federal Reserve and the European Central Bank, are becoming less common. Some major banks are now bullish on the euro. For instance, Bank of America predicts that EUR/USD will rise to 1.1, arguing that all positive factors have already been factored into quotes, suggesting that the dollar is overvalued, and it's time to sell. Hedge funds share a similar outlook, having shed speculative positions in the US dollar for four consecutive weeks. Additionally, the decline in risk reversals in the US dollar index indicates a potential pullback in EUR/USD.

Dynamics of Reversal Risks in the US Dollar

According to Morgan Stanley, the EUR/USD currency pair is expected to break higher towards 1.08 soon. The main factors contributing to this outlook include a gradual narrowing of long-term interest rates in both the US and Europe, rumors of a renewed cycle of monetary expansion by the Fed, a potential US government shutdown, and an overall overextended dollar positioning.

In my view, the future of the EUR/USD pair will depend on whether Donald Trump's statements align with his actions. If 25% tariffs against Mexico and Canada are implemented, the EUR/USD pair is likely to decline. The euro's failure to break above 1.05 and establish a solid foothold there suggests that investors still have faith in the US president. Will he ultimately let them down?

From a technical perspective, the EUR/USD has been consolidating in the range of 1.0445 to 1.05 on the daily chart. A breakout above the upper boundary of this range would provide a strong signal to buy euros against the US dollar. Conversely, a successful breakdown below the lower boundary would indicate a selling opportunity, targeting levels of 1.042 and 1.0355.