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USD rebound signals trouble for eurozone markets and global outlook

The poor US currency continues to face extreme volatility. The greenback keeps swinging. However, its recent recovery may prove to be a turning point. The dollar might finally break the streak of declines that began at the start of 2025. If this scenario unfolds, experts believe the pressure on European stocks will ease.

According to analysts, the dollar, which had fallen by 10% from its January highs, recently rebounded following US trade agreements with Japan and the European Union. Barclays analysts describe this movement as the early stage of a broader price shift. They also note that current trader positioning against the USD appears overcrowded, while US earnings and macroeconomic data remain resilient.

However, the outlook is not as bright for the European equity market. The euro’s rally, driven largely by capital flows rather than interest rate differentials, has had a negative impact on European earnings, particularly for exporters.

Currency strategists at Barclays forecast a gradual weakening of the euro, with the EUR/USD pair potentially falling to 1.1300. The experts noted that this shift could potentially undo some of the benefits the eurozone experienced earlier in 2025, when a weaker dollar and worsening trade conditions due to tariffs had temporarily worked in its favor.

As a result, European stocks are lagging behind their American counterparts. Barclays notes that the euro’s strength has harmed corporate profits more than President Trump’s tariffs, worsening economic forecasts. A renewed rise in the greenback, however, may bring some relief, potentially improving earnings projections for European companies.

Still, certain risks remain in the medium term. A sustained USD rally could be hindered by concerns over Federal Reserve independence and potential interest rate convergence in 2026, especially if economic growth in Germany or the broader EU outperforms expectations.

According to Barclays analysts, the currency market is no longer a one-way bet. “If the dollar has in fact bottomed, it would mark a meaningful shift in global equity drivers,” they conclude.

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