The EU-U.S. trade deal dented euro strength. Strategists say that may not last

The euro has fallen over 2% against the dollar following the EU-US trade deal, as the agreement is perceived as a drag on EU growth, contrasting with strong US economic data and the Federal Reserve's cautious stance on rate cuts, leading to expectations of continued short-term euro weakness. Despite this, some strategists anticipate a euro rebound by 2026, driven by an expected dovish shift from the Fed and a narrowing transatlantic growth differential as Europe's economy gains momentum, potentially weighing on the dollar long-term.

Analysis

The euro has experienced a significant decline of over 2% against the U.S. dollar, triggered by a new EU-US trade agreement that the market perceives as a net negative for European growth. While the deal avoids a worst-case tariff scenario, the establishment of a 15% baseline rate is viewed as a future drag, contributing to forecasts of stagnation in key economies like Germany, whose GDP already contracted by 0.1% in the second quarter. This contrasts sharply with the U.S., where GDP growth rebounded to a stronger-than-expected 3%. This economic divergence, coupled with a cautious Federal Reserve hesitant to cut rates, has fueled a dollar rebound and suggests continued pressure on the EUR/USD pair in the near term, with analysts at Rabobank and Ebury seeing more room for the dollar to strengthen on a one-to-three-month horizon. However, a longer-term reversal is anticipated by 2026, with strategists forecasting a potential euro recovery to the $1.20 level. This outlook is predicated on a projected dovish shift by the Federal Reserve, a narrowing transatlantic growth gap driven by European fiscal expansion, and structural headwinds for the dollar, including U.S. protectionist policies and fiscal imbalances. The European Central Bank's perceived conclusion of its rate-cutting cycle further supports this long-term bullish case for the euro.

Key Decisions for Investors

• Given the negative sentiment surrounding the trade deal's impact on EU growth and strong US economic data, investors should anticipate continued downward pressure on the EUR/USD pair in the one-to-three-month term.
• For those with a longer investment horizon into 2026, the potential for a dovish Federal Reserve pivot and a narrowing EU-US growth differential presents a strategic opportunity for a significant euro rally; monitor for signs of this policy shift.
• Key indicators to watch are forward guidance from Federal Reserve meetings, European growth figures, particularly from Germany, and any further details on the implementation of trade tariffs, as these will be primary drivers of the currency pair's direction.