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14.03.2025 12:45 AM
Euro Faces a Potential Coup d'Etat
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The Green Party responded to Friedrich Merz's call for a coalition between the CDU and the Social Democrats, aimed at abolishing the fiscal brake, with a strong rebuttal: "We don't believe you!" Many believe that the new German Chancellor has the potential to transform the country into a leading force in Europe, which has driven EUR/USD quotes above 1.09. The time for decision-making is approaching.

The debate in the Bundestag has become a preparatory exercise, with the final vote scheduled for March 18. The Alternative for Germany party has labeled Merz's plan a "fiscal coup d'etat" and plans to vote against it. The Greens might provide a glimmer of hope, but their support seems uncertain.

The future of the euro is precarious, as many positive factors have already been factored into EUR/USD quotes. The main currency pair has risen on expectations, but if Friedrich Merz's efforts fail, a rapid and painful decline could ensue.

This decline might be mitigated by the weakness of the U.S. dollar. Following the consumer price data, the USD index has taken a hit from producer prices. In February, the Producer Price Index (PPI) stagnated, and excluding food and energy, the indicator contracted for the first time since July. The trend of disinflation continues, prompting the Federal Reserve to consider when to resume lowering the federal funds rate.

Dynamics of the U.S. Producer Price Index

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As concerns about a recession grow—potentially a result of the White House's aggressive protectionist policies—loosening monetary policy could be just what the U.S. economy needs. However, this approach may also lead to a decline in the value of the U.S. dollar. It remains uncertain who will suffer more from the trade war.

In response to retaliation from the European Union, Donald Trump has threatened to increase tariffs on imports of French and European wines to 200%, unless Brussels reverses its decision on tariffs. This scenario seems familiar; during a Republican president's first term, tariffs were first raised by the U.S. and then reciprocated by China. Ultimately, China faced significant losses, and the same fate may await Europe.

This image is no longer relevant

One issue is that European exports to North America far exceed the imports in the opposite direction. Therefore, similar to China eight years ago, Europe finds itself in a precarious position. If Friedrich Merz's fiscal stimulus plan is approved by the Bundestag, it may help mitigate the negative impacts of a trade war. However, if this plan does not proceed, the risks associated with buying euros increase. It may be wise to secure profits from previously opened long positions and take a wait-and-see approach as developments unfold in the Bundestag and the White House.

On the daily chart for EUR/USD, there was a formation of an inside bar and a test of the upper boundary of the fair value range. This test ultimately failed, but the bears are eager to make another attempt. If they successfully break the support level at 1.0825, it will provide an opportunity to increase short positions that were established from 1.0875 on the euro against the U.S. dollar.

Marek Petkovich,
Analytical expert of InstaForex
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