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Recent German elections aligned with projections, yielding a slight euro (EUR/USD) increase due to the CDU/CSU potentially forming a coalition solely with the SPD. This week, FX markets anticipate significant volatility.
The US dollar faced headwinds due to underwhelming data and revised expectations regarding temporary US tariffs. The future of US protectionism remains crucial, with renewed focus on Mexico and Canada tariffs. While a large tariff imposition is unlikely, potential last-minute deals create downside risks for CAD and MXN.
Heightened dollar sensitivity to US data underscores the importance of upcoming releases, particularly consumer sentiment. Revised GDP data is anticipated, along with personal income, spending, and the core PCE index, which is expected to show a slight increase.
While a definitive dollar trend is unlikely, potential peace talks between Russia and Ukraine could weaken the dollar. However, tariff deadlines and core PCE data could offer support. A neutral short-term dollar bias exists, tempered by the German election results.
The euro saw a positive response to the German election. With a two-party government expected, German politics may recede as a primary driver for EUR/USD, with US tariffs and peace talks taking precedence. Upcoming Ifo surveys and eurozone CPI estimates are anticipated. Cautious on EUR/USD beyond 1.050 due to US tariffs and the ECB’s dovish stance, a potential return below 1.04 is expected.
