Euro-to-Dollar Week Ahead Forecast: Tariff Uncertainty Proves Constructive

🎯 EUR/USD year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. Request your copy.

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The euro looks poised for gains against the dollar.

The euro to dollar exchange rate (EUR/USD) rises to 1.1811 on Monday as it extends a recovery from last week's lows at 1.1741.

The advance is part of a broader pullback in the dollar linked to uncertainty as to where U.S. President Donald Trump will steer the country's tariff policy following last week's Supreme Court ruling that ruled some tariffs illegal.

Never one to back down, Trump will likely devise alternative tariff structures to ensure the overall tariff rate on imported goods stays at meaningful levels. "The broad market assumption is that this is not the end of the tariff story, and the President will seek a way around the ruling," says Kit Juckes, lead FX analyst at Société Générale.

The U.S. government needs tariff revenues to stem the country's growing budget deficit and pay for tax reductions, which opens the door to increasingly creative attempts to raise import duties.

The issue for the dollar is that uncertainty is rising again, confirming the biggest headwind to the currency is policy-related.

It points to contradictory forces pushing and pulling the dollar - on the one hand, there's a robust economy and fading expectations for Federal Reserve rate cuts pushing it higher, but on the other, there's a series of policy-related concerns pulling it lower.

"The gap between expected Eurozone and US growth ought to be supporting the dollar, and 2-year rate differentials argue for a weaker euro," says Juckes.

For the week ahead, a move towards 1.19 is favoured on the basis that the euro will remain a favoured alternative to the dollar in a world of uncertain U.S. trade policy.

Last week's dip below 1.18 meant the market was starting to put more weight on economics and interest rate policy, but Friday's ruling served as a reminder there's a lot more to the dollar's valuation than fundamentals.

"Short-term trends look set to persist: The euro is supported by growing optimism about the German economy, and the dollar is unlikely to rally strongly until the focus shifts back to US growth and Fed policy," says Juckes.

Euro-dollar that looks to be reasserting itself above the important 1.18 level again, and there's a chance that the recent pullback marked a new 'higher low' in the trend higher.

If so, then it won't be too long before the pair establishes itself above 1.20.

🎯 EUR/USD year-ahead forecast: Consensus targets from our survey of over 30 investment bank projections. Request your copy.