Market Shifts: USD Uncertainty, EUR Politics, and Bitcoin's Sudden Drop

The U.S. dollar's trajectory remains uncertain, as lower yields in the U.S. continue to limit its gains. While trade policy developments, particularly President Trump's aggressive tariff plans, could introduce volatility, the broader economic landscape suggests that the dollar might struggle to sustain strength in the coming months.

US10Y Bonds 

U.S. Dollar Outlook: Policy and Market Reactions

The recent confirmation from President Trump that 25% tariffs on Canada and Mexico are "moving along very rapidly" has yet to generate a significant response from the respective currencies. However, with additional tariffs on steel, aluminium, semiconductors, and pharmaceuticals scheduled over the next two months, the risk of heightened financial market turbulence remains. Historically, Trump’s previous term saw the dollar weaken due to a lack of actual tariff implementation. This time, however, the administration has already enacted a 10% tariff on Chinese imports, with further increases on the horizon.

DXY H4 Chart 

From a macroeconomic perspective, the U.S. is likely at the peak of its current economic cycle. Growth in the past two years has hovered around 2.8%-2.9%, and the Federal Reserve has eased interest rates slightly from its most restrictive stance since the Global Financial Crisis. The key risk here is that slowing growth could pave the way for further monetary easing, a scenario that typically pressures the dollar downward. Additionally, rising consumer credit delinquencies—now at levels not seen since 2011—signal growing strain on U.S. households. As such, weaker economic data is driving down front-end yields, with the 2-year U.S. Treasury yield hitting a new year-to-date low.

EUR/USD: A Shifting Political and Economic Landscape

The euro experienced an initial surge following Germany’s election results, with EUR/USD reaching an intra-day high of 1.052 before retracing. While Friedrich Merz’s CDU-CSU victory offers potential for pro-growth policies, optimism faded as traders considered the hurdles ahead. A CDU-SPD coalition now appears likely, potentially paving the way for corporate tax cuts and relaxed fiscal rules—factors that could bolster German economic sentiment in the medium term.

EURUSD 30 minutes Chart 

Despite these potential structural benefits, near-term euro strength may remain limited. The European Central Bank is weighing its options regarding its rate-cutting cycle, with recent statements suggesting some policymakers favour an earlier pause. This could provide a slight tailwind for the euro, particularly if U.S. yields continue to decline. However, geopolitical risks and uncertainty around fiscal policy agreements within Germany could temper bullish sentiment.

Bitcoin's Sharp Decline and Other Market Considerations

Bitcoin has experienced a dramatic drop of over 10% in less than two days, driven by a combination of profit-taking, concerns over regulatory crackdowns, and broader risk-off sentiment in financial markets. A wave of liquidations in leveraged positions further exacerbated the selloff, as traders rushed to exit amid heightened volatility. While long-term adoption trends remain intact, near-term pressures could keep Bitcoin volatile as investors reassess risk appetite.

Bitcoin Chart H4

One of the standout dynamics in FX markets right now is the Japanese yen’s relative strength. Given the heightened risk environment, characterized by trade policy uncertainty and potential economic slowdown, the yen stands out as the G10 currency with the most room for appreciation.

Looking ahead, key economic indicators—such as U.S. consumer confidence data and European fiscal policy updates—will help shape currency movements. With the Federal Reserve maintaining a cautious stance and geopolitical tensions simmering, volatility remains a defining feature of the FX market. The dollar may remain under pressure, especially if the Fed signals a more accommodative stance in response to weaker growth data.

The next few months are set to be pivotal for the U.S. dollar and euro. While U.S. trade policy and economic headwinds could weigh on the dollar, potential shifts in European fiscal policy may provide support for the euro in the medium term. As always, FX traders will need to navigate a complex landscape of macroeconomic data, policy decisions, and geopolitical developments.

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