Euro-Dollar Poised for Trump "Day One" Announcements

Official White House Photo by Shealah Craighead

The next leg lower in the Euro to Dollar exchange rate will require "some big USD-positive headlines from Trump on Monday."

This is according to Francesco Pesole, FX Strategist at ING Bank, who explains, "EUR/USD appears to have found a short-term anchor at the 1.0300 handle."

Monday's presidential inauguration brings risks aplenty for foreign exchange markets, which will be asked to find appropriate levels for those currencies belonging to countries and trading blocs that tariff hikes could damage.

Pesole says that at current levels, Euro-Dollar embeds a 2.5-3% risk premium (i.e. undervaluation), suggesting markets are prepared for the Eurozone to suffer an economic hit as new policies are unleashed.

Markets have nevertheless paused their chase of EUR/USD to lower levels as there are growing risks of upside surprises if Trump is less 'hawkish' on trade than previously expected.

Pesole says he prefers to "lean against another big leg lower in the pair" but that the undervaluation in the Euro won't be materially trimmed until more clarity on Trump’s protectionism policy emerges.

Foreign exchange markets are readying for Trump's 'day one' proclamations, which will provide some finality following weeks of speculation.

Financial news pages have been awash with contradictory reports about the extent and nature of tariffs. The rule of thumb is that a blanket tariff on all imports is the most bullish outcome for the Dollar. Other currencies tend to recover on reports that Trump will be more nuanced, preferring to use the tariff threat as a negotiating stance.

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Analysis from Deutsche Bank suggests markets might still be underestimating the looming Trump shake-up.

"Our conclusions are not optimistic: despite recent moves, the market is not pricing sustained macro divergence between the US and the rest of the world, nor a big trade war," says George Saravelos, an analyst at Deutsche Bank.

Saravelos says his analysis doesn't try to predict what Trump will do; rather, he looks at how much "policy premium" is being reflected in currencies most exposed to a potential regime break:

The best placed:

• Australian Dollar
• Swiss Franc

Vulnerable to tariffs:

• Euro
• Chinese Yuan

Vulnerable to higher global interest rates

• Pound
• New Zealand Dollar

With the market not yet fully priced for Trump, Deutsche Bank are chasing further weakness.

"We enter 2025 maintaining our dollar bullish view," says Saravelos. "The greenback has potential to exceed its
Volcker all-time highs, equivalent to a EUR/USD drop to 0.95."

Although the outlook poses significant downside risks for the Euro against the Dollar, Saravelos says this is also a year
to remain open-minded: extended positioning and the potential for verbal intervention from Trump are the most immediate near-term dollar risks.

"Our views are almost certain to change as President Trump decides which policy norms he will ultimately break," he adds.

The tariff risk premium that is priced in across a range of metrics is not especially large, according to Deutsche Bank's research, "and we expect market pricing to be front-loaded as Trump unveils a range of executive tariff investigations," explains Saravelos.