The EUR/USD pair continues its downward trend in early Monday trading, hovering near 1.0720 as a stronger U.S. Dollar (USD) and political uncertainty in Germany weigh on the Euro (EUR). This marks the pair’s second consecutive session under pressure, reflecting both global monetary policy expectations and Eurozone-specific political challenges.
Factors Driving USD Strength
The U.S. Dollar’s recent gains have been bolstered by a shift in investor sentiment as traders anticipate that Donald Trump’s potential return to office could lead to fiscal policies, including a 10% tariff increase on imports and corporate tax cuts. Analysts suggest these policies could drive investment, spending, and labor demand, which would likely raise inflationary pressures in the U.S. and prompt the Federal Reserve (Fed) to adopt a more restrictive monetary stance. This outlook supports USD’s ongoing appreciation, putting pressure on the EUR/USD pair.
Fed Chair Jerome Powell, however, recently reiterated that the Fed does not base policy decisions on speculative changes in government. In line with market expectations, the Fed lowered rates by 25 basis points last week to 4.50%-4.75%, but Powell emphasized that future policy decisions will be guided by actual economic data rather than speculation.
The preliminary University of Michigan Consumer Sentiment Index’s rise to 73.0 in November (up from 70.5 in October) further boosted the Greenback, signaling resilient consumer confidence.
Political Uncertainty in Germany Adds to EUR Weakness
In Germany, Chancellor Olaf Scholz’s decision to replace the finance minister has effectively dissolved the ruling coalition, leading to political instability and prompting calls for new elections. This political uncertainty has weighed on the Euro as concerns mount over the economic impact of potential instability.
Analysts at Deutsche Bank have warned that Trump’s proposed tariffs could add further strain to the Eurozone economy, especially its export sector, potentially slowing growth in an already fragile economic landscape. “The level of uncertainty is high, from the impact of U.S. tariffs to Europe’s timing and strategy for responding,” analysts noted, adding to the Euro’s downside risks.
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