A Rebound of the EURUSD Is Likely

The U.S. Dollar Index (DXY) rose by 1.20% to 98.82 points this week, while the EURUSD declined by 1.49% to 1.15650, reaching the correction target range of 1.15000–1.15500. The pair touched a low of 1.15260, the weakest level since June 23. The main catalyst for the decline was the newly announced U.S.-EU trade agreement. U.S. President Donald Trump unveiled the deal following talks with European Commission President Ursula von der Leyen, under which the EU agreed to impose 15% tariffs on exports to the U.S., while the exact terms of EU tariffs on U.S. imports remain uncertain but are also expected to be around 15%, with several items excluded. Additionally, European countries committed to purchasing $750.0 billion in U.S. energy and military equipment over the next four years and to investing $600.0 billion into the U.S. economy. However, 50% tariffs on steel and aluminum will remain in place, with U.S. producers receiving preferential customs treatment.

At first glance, this deal appears largely disadvantageous for the EU. While the tariff rates are lower than the previously threatened 30%, the bloc is giving up cheaper energy sources, risking major capital outflows, and conceding competitive ground to U.S. manufacturers. Furthermore, many experts question whether the scale of European investment and energy imports from the U.S. is realistic, suggesting the agreement may not be fully implemented.

The EURUSD reacted swiftly, falling 1.20% to 1.15890 on June 28 and another 0.50% to 1.15260 the following day. Outside of the summer season, such a move might have developed into a prolonged downtrend. However, the low liquidity typical of summer months makes the formation of sustained trends less likely before September, increasing the vulnerability of the market to a sharp rebound. Several factors could trigger such a move.

One key factor is the start of a new round of U.S.-China trade talks in Stockholm, which markets are viewing with cautious optimism. However, a complicating element is Trump’s decision to shorten Russia’s deadline for resolving the Ukraine crisis from 50 days to just 10–12. This makes it nearly impossible for Washington to reach an agreement with Beijing without addressing the looming threat of 100% tariffs on countries that continue importing Russian oil, a measure set to take effect within that shortened timeframe. China has signaled it cannot accept a Russian defeat, and in fact benefits from an extended conflict, as a resolution would allow the U.S. to shift its military focus to the Pacific. This geopolitical tension could stall trade negotiations, much like a similar impasse in April that led to a 7.0% Dollar decline against the Euro.

Another factor that could halt further EURUSD declines is related to Federal Reserve policy. Just a week ago, Trump publicly criticized Fed Chair Jerome Powell, fueling speculation about his possible removal. But following a visit to Fed headquarters just days before the upcoming FOMC meeting, Trump softened his stance. This suggests Powell may have yielded to political pressure. If so, the Fed might surprise markets with an unexpected 25 basis point rate cut on Wednesday, a move currently priced in at just 3.6% probability. Such a surprise would likely trigger a sharp reversal in the Dollar, potentially driving the EURUSD back toward the 1.17000–1.18000 within days.

Large institutional investors have been capitalizing on the recent Dollar strength, marking a third straight week of accumulation. Over the past week alone, $3.9 million was added to the WisdomTree Bloomberg US Dollar Bullish Fund (USDU), signaling continued bullish sentiment. However, given that much of the recent upside appears priced in, these investors may now be taking profits around the 1.15000–1.15500 area. Alternatively, they could be building a longer-term bullish position on the Dollar, which wouldn’t necessarily prevent a short-term EURUSD rally above 1.17000. In fact, such a rebound could provide a more favourable entry point for renewed Dollar accumulation.