Everything new is well-forgotten. At the end of 2024, bearish forecasts for EUR/USD were widespread. The argument was that White House tariffs would slow eurozone GDP while accelerating inflation in the U.S. The European Central Bank would be forced to cut rates to save the bloc's economy, while the Federal Reserve would hold steady—ultimately leading to a decline in the euro's value against the U.S. dollar. In reality, the opposite happened, mainly because no one knew what the tariffs would look like—or whether the U.S. economy could withstand them. But as July draws to a close, the old narratives are returning.

EUR/USD initially welcomed the 15% U.S. tariff agreement with the European Union. Brussels portrayed it as a path toward stability and predictability, reminding everyone how bad things could have been—import duties might have reached 50%. Germany, in particular, breathed a sigh of relief. In 2024, it exported 34 billion dollars' worth of new vehicles and auto parts to the United States. There's a big difference between paying 15% and 25% for access to the large and lucrative American market.

U.S. Foreign Trade with Other Countries

However, investors have gradually come to realize that the eurozone is facing a double blow. A 13% appreciation of the euro against the U.S. dollar, combined with 15% tariffs, poses a heavy burden on the already fragile shoulders of exporters in the currency bloc. Given the region's export-driven structure, Bloomberg's forecast that tariffs would shave just 0.4 percentage points off GDP now seems overly optimistic—as do projections for 0.7% growth by the end of the year.

Yes, the eurozone economy has so far demonstrated remarkable resilience. After all, since April 2, the total effective tariff burden (including the base 10% and previously imposed duties) has exceeded 15%. However, considering the front-loading of U.S. imports earlier in the year, it all starts to make sense. The eurozone's success appears to have been temporary.

Perhaps asset managers and hedge funds—who are gradually closing net short positions on the U.S. dollar—are right: maybe it's time to return to last year's narratives and start selling the euro against the greenback.

Dynamics of Speculative Positions on the U.S. Dollar

Indeed, if the U.S. budget is replenished through tariff revenue, the Treasury won't need to rely on bond buyers to fund Donald Trump's ambitious tax cut legislation. The 3.4 trillion dollars in fiscal stimulus will boost the U.S. economy and revive the narrative of American exceptionalism—the very theme that supported the dollar's strength in 2023–2024. Why shouldn't the dollar recapture its former shine?

Technically, on the daily chart, EUR/USD is testing the lower boundary of its fair value range, which is 1.1665–1.1810. A breakout would allow traders to build on short positions initiated from 1.1690. Conversely, a rebound from current levels would increase the risk of further consolidation in the major currency pair.