Euphoria has come to the markets. US stock indexes are rewriting records again, and the euro is rising as the currency of optimists due to the de-escalation of the US-China trade conflict. Donald Trump said that following the meeting with Xi Jinping, the parties should leave with a trade deal. Investors take a look into the past and realize that against this background, the EURUSD has only one path. Up.
Indeed, the S&P 500 jumped 3.3% in May after productive talks between the United States and China in Geneva. The broad stock index rose 0.5% in September following Scott Bessent’s statements about the basis of the TikTok deal following the Madrid meeting. This can also include a 1.7% rise in the stock market in April after reports that Washington may reduce tariffs against Beijing and an October increase on Donald Trump’s statement that import duties are unsustainable. In all cases, there was an improvement in global risk appetite, which supported the EURUSD.
“Bulls are restrained by a split in the Fed’s ranks, which may turn into hawkish rhetoric following the FOMC meeting on October 28-29. However, slower-than-expected inflation growth in September dampens these fears. The central bank is concerned about the cooling of the labor market and intends to continue the cycle of monetary policy easing. Derivatives are confident of a reduction in the federal funds rate in October, December and March.
On the contrary, the ECB has most likely completed the cycle of monetary expansion. The last time the deposit rate fell was in June. Since the summer, Christine Lagarde has argued that the central bank is in a good position. If, following the results of the Governing Council meeting, she reports that the cost of borrowing may rise or fall, this will be perceived as a “hawkish” signal and will open the way for EURUSD to the north.
The euro is supported by positive macro statistics. Following the pleasant surprise from the eurozone’s business activity, German business sentiment was pleased. It seems that the currency bloc is adapting to Donald Trump’s tariffs and believes in a bright future. This is partly due to Germany’s fiscal incentives and increased EU defense spending.
A new round of events in the political drama in France is constraining the EURUSD. Appetite comes with eating. Encouraged by the postponement of pension reform deadlines, the Socialists are demanding an increase in taxes on the rich. Otherwise, they threaten the government with a vote of no confidence. At the same time, the growth in the yield spread of local and German bonds is holding back the offensive momentum of the euro.
