EUR/USD continues its upward movement, trading around 1.1390 during Asian hours on Monday, buoyed by US President Donald Trump’s extension of the 50% tariff deadline on EU imports until 9 July. European Commission President Ursula von der Leyen expressed the EU’s readiness for swift trade negotiations, though further time is needed to finalise a deal, and US markets are observing the Memorial Day holiday.

On Friday, Trump threatened to impose 50% tariffs on EU imports, criticising Brussels’ trade proposal and suggesting the tariffs start on 1 June 2025 due to stalled negotiations. The pair also benefits from a weaker US Dollar, attributed to ongoing economic uncertainties, with Trump’s proposed bill potentially exacerbating the fiscal deficit and potentially influencing bond yields and borrowing costs.

US Economic Outlook Concerns

The US economic outlook seems precarious, as Moody’s downgrades the US credit rating from Aaa to Aa1, forecasting federal debt to surge to 134% of GDP by 2035 from 98% in 2023, and a budget deficit nearing 9% of GDP. Federal Reserve officials, citing uncertainty from Trump’s tariff threats, appear hesitant to adjust interest rates, with Chicago Fed President Austan Goolsbee suggesting delays and Kansas City Fed President Jeffrey Schmid advising a data-driven approach.

Now that EUR/USD is hovering near 1.1390, we’re seeing clear momentum shaped by recent political manoeuvring on both sides of the Atlantic. The decision from Trump to push back the US’s 50% tariff deadline until early July injected some short-term optimism into the currency pair. While initially framed as a temporary reprieve, it opens a small window that markets are pricing in—understanding that negotiations haven’t collapsed, even if the talks are far from resolved.

What von der Leyen said confirms that Brussels is still open to dialogue, but the admission that more time is required implies a lack of concrete outcomes so far. Given that the US is on a market holiday, liquidity is somewhat thinner, which could exaggerate price reactions in both directions over the next couple of sessions. We must be cautious of sharp reversals that can stem from low-volume trading hours, especially in early European trade.

On Friday, the threat of immediate tariffs by Trump, set to begin in 2025, triggered a short flurry of risk aversion, but markets have since adjusted. Traders seem focused instead on the broader weakness in the US Dollar, which continues to act as a tailwind for the euro. The proposed trade measures, if realised, could feed into already widening budgetary gaps in the US, something that bond markets are watching closely. Rising deficits naturally pressure yields, as the government must borrow more at a time when rates remain sticky.

Federal Reserve and Market Sentiment

There’s been added tension with Moody’s cutting Washington’s credit rating, which reflects longer-term structural debt concerns. A move from Aaa to Aa1 may not immediately shift capital flows, but the downgrade essentially confirms what we already know: debt is swelling far faster than revenue. They forecast over 130% debt-to-GDP within a decade, and with the deficit already at 9% of GDP, the US will likely need to either cut spending or increase revenues—neither of which seems politically likely this side of an election.

Goolsbee from the Chicago Fed seems wary of pulling any monetary levers too quickly, pointing to mixed signals in both domestic data and external trade tensions. That caution is echoed by Schmid, who insists policy action must stay tethered to incoming numbers. These positions suggest policy will stay on hold in the near term rather than become more accommodative, especially while inflation readings stay sticky.

That said, market participants would be better served focusing less on forward guidance from central banks, and more on high-frequency CPI, jobs, and real yield data over the coming fortnight. EUR/USD price action will hinge on whether rate expectations remain flat or shift due to data surprises.

From a position management perspective, we are inclined towards setups that reflect sideways consolidation in short-term horizons, with a possible upside bias if risk appetite stabilises and US yields hold. Be alert to German and French macro readings this week—any undershoots there may pause euro advances, but would not yet suggest a structural reversal. We must stay nimble on any headlines coming out of Washington or Brussels. Premature commitments could be exposed by sudden policy shifts.

Avoid passive exposure near key technical levels unless confirmed by volume upticks or sharp directional flows. Use stops tightly in the current structure—it is too asymmetric to rely on stale correlations.

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