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Trouble came from where it was least expected. Frustrated by its coalition partners' refusal to support its immigration control plans, the Freedom Party dismantled the Dutch government. The country will most likely hold early elections. The rise in political risks forced EUR/USD to retreat. Can the drop in U.S. stock indices bring the main currency pair back to its original positions?
The EUR/USD rally has been driven by capital outflows from the U.S. to Europe. The White House's protectionist policies have been scaring investors, pushing them to sell U.S. stocks and bonds and transfer their funds across the Atlantic. The support for the EU came not only from monetary and fiscal stimuli but also from political stability. After disputes in France and Germany subsided, everything seemed calm. The collapse of the Dutch government came unexpectedly.
Frightened investors overlooked the fact that due to trade wars, the Organization for Economic Cooperation and Development (OECD) has already downgraded forecasts for 2025 for the second time. Global GDP estimates were cut by 0.2 percentage points to 2.6%, and U.S. GDP by 0.6 percentage points to 1.6%. Projections for the eurozone remained unchanged, which should be seen as good news for EUR/USD.
The downgrade in U.S. economic growth forecasts, coupled with further slowing in manufacturing sector activity and mutual accusations between Washington and Beijing over trade agreement breaches, are hindering U.S. stock indices. As a result, the dollar may also come under pressure. However, seasonal factors might help the EUR/USD bears.
Credit Agricole points out that since 2005, the greenback has reversed the negative May trend in June in 85% of cases. This time, there are at least two reasons for history to repeat itself: the U.S. economy appears more resilient than expected, and the de-escalation of trade conflicts benefits EUR/USD sellers.
Investors have become accustomed to Donald Trump's "threats followed by negotiations." According to research by Nomura, buying the S&P 500 five days after Trump escalated tensions would have yielded a 12% profit since February. Simply holding the broad stock index over the same period would not have earned a cent.
Investors are now used to Trump's tariff threats and are even leveraging them to their advantage. This could create a cushion for the S&P 500. The absence of a severe decline in the broad market index would likely keep EUR/USD in a sideways range.
On the daily chart of the main currency pair, the bears are attempting to push EUR/USD back into the fair value range of 1.118–1.138. A rebound from the upper boundary would allow for building up long positions. If EUR/USD drops below 1.128, it would make sense to switch to selling. A "bull trap" (false breakout) pattern would be activated in that scenario.
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