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03.06.2025 12:38 AM
EUR/USD. The Dollar Falls Out of Favor Again

The euro-dollar pair is once again attempting to breach the 1.14 figure. This is far from the first attempt by EUR/USD buyers over the past two months. At the end of April, traders even briefly touched the 1.15 figure, reaching 1.1574, but failed to hold their positions, and the pair dropped nearly 500 pips.

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Interestingly, all these price fluctuations were driven by the same underlying reasons. The news triggers may vary, but the essence remains the same: whenever signs of de-escalation in the trade war appear, the dollar strengthens. Conversely, when tensions rise, the greenback weakens sharply. Hence, the extent of price fluctuations. There's no clear pattern (as the "negotiation track" is highly unpredictable), but distinct phases are characterized by either an increase or decrease in risk aversion.

We are witnessing a phase of dollar weakening, which is reacting sharply to the latest surge in U.S.-China tensions. Therefore, the future trajectory of EUR/USD will depend on how events unfold. If escalation continues (for instance, if Trump reinstates 145% tariffs on Chinese goods ahead of schedule), the dollar will weaken further; if de-escalation occurs (such as news of a planned meeting or phone call between Xi Jinping and Trump), the greenback could quickly regain lost ground.

As of today, there are no signs of reduced tensions. On the contrary, after Trump accused China of violating agreements, Beijing responded with similar accusations against Washington. Moreover, China accused the U.S. of a "serious violation" of the trade truce and threatened retaliatory measures.

Recently, the U.S. has taken several unfriendly steps that were predictably unwelcome by Chinese authorities. For example, the U.S. threatened sanctions against any entity using new Huawei chips, claiming these processors contain or were made with American technologies, potentially violating U.S. export controls. In response, China threatened sanctions against those adhering to American restrictions.

Further, last week, U.S. Secretary of State Marco Rubio (a noted "hawk" on China) announced that America would "aggressively revoke visas for Chinese students" and that new visa applications from China and Hong Kong would undergo stricter scrutiny. Rubio asserted that many Chinese students have ties to the Communist Party while studying at U.S. universities and gaining "critical information."

The final blow came from U.S. Treasury Secretary Scott Bessent, who expressed that further escalation could only be resolved with a direct phone call between Trump and Xi Jinping. However, he couldn't confirm whether such a call was scheduled.

Recall that Trump promised a phone conversation with Xi immediately after their Geneva meeting on May 11, claiming it would happen by the end of that week. Yet, nothing materialized, and tensions have only escalated since.

Thus, the dollar is again under pressure, and EUR/USD is trying to consolidate within the 1.14 figure.

The official statement from China further fueled tensions. A representative from China's Ministry of Commerce condemned the new U.S. restrictions and stated that if Washington continues undermining Chinese interests, "Beijing will take radical steps to defend its legal rights." Specific measures weren't disclosed, but the confrontational tone was unmistakable.

Additional pressure on the dollar came from Trump's Friday announcement to double tariffs on imported steel and aluminum from 25% to 50%, increasing the burden on global steel producers and exacerbating the global trade war.

It's also worth noting that despite Trump's optimistic statements about the prospects of a deal with the EU, negotiations with Brussels remain difficult and thus far fruitless. Analysts at Bruegel suggest that an agreement between the EU and the U.S. is "unlikely to be reached within the 90-day deadline set by the American president." This means that by July 9, Trump may fulfill his threat and raise tariffs on European goods to 50%.

In other words, the current fundamental backdrop supports further weakening of the greenback and a corresponding rise in EUR/USD. It makes sense to use corrective pullbacks to open long positions. The first target for the upward movement is 1.1450 (the upper line of the Bollinger Bands on the D1 timeframe). The main target is 1.1570 (the upper line of the Bollinger Bands on W1).

Irina Manzenko,
Analytical expert of InstaForex
© 2007-2025
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