Market Outsmarts the US Dollar. Forecast as of 06.01.2026
Market Outsmarts the US Dollar. Forecast as of 06.01.2026
Investors were convinced that tariffs would spur inflation and dampen international trade, so they bought the US dollar. In fact, the opposite happened, causing the USD index to plummet by 9% in 2025. Let's discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- A shift away from safe-haven assets has weakened the US dollar.
- Disappointing PMI data boosted the EURUSD pair.
- US tariffs produced the opposite impact.
- Consider long trades if the EURUSD pair settles above 1.171.
Weekly US Dollar Fundamental Forecast
Risk aversion briefly increased amid developments in Venezuela. Although a full-scale conflict was avoided, the detention of the country’s president was enough to push some investors toward safe-haven assets, while others took advantage of the pullback and bought risky assets. Ultimately, markets shifted away from fear-driven trading. The US dollar experienced heightened volatility, but temporary geopolitical support failed to alter speculators’ stance on the currency. Traders continue to hold the largest net short positions in the greenback since July.
Speculative Positions in the US Dollar
Source: Bloomberg.
The rally in the EUR/USD pair was driven not only by investors moving away from safe-haven assets. The US dollar also suffered from disappointing manufacturing PMI data, which fell to a 14-month low, as well as dovish comments from Minneapolis Fed President Neel Kashkari, who voiced concern about a potential rise in unemployment.
Notably, the combination of soft PMI data and a deteriorating labor market may be linked to US tariffs. Before their introduction on Independence Day, investors expected higher import duties to fuel inflation and slow global trade. Instead, global trade is estimated to have expanded by around 7% in 2025, reaching a record $35 trillion, while prices have continued to cool.
This outcome is hardly surprising. Research by the Federal Reserve Bank of San Francisco shows that past tariff increases between 1886 and 2017 reduced inflation by about 0.6 percentage points for every 1 percentage point rise in tariffs. Higher import duties were also associated with rising unemployment, as uncertainty prompted businesses to cut costs through layoffs. Weak domestic demand ultimately became the main driver of slower price growth.
History appears to be repeating itself. Rising unemployment and decelerating price growth are again emerging as the labor market cools. Market pricing has largely aligned with this view, as has Fed Governor Christopher Waller, whose argument that slower employment growth would lead to only temporary price increases paved the way for three preemptive federal funds rate cuts in 2025.
The market showed its foresight by selling the US dollar shortly after Independence Day. Before that, investors widely believed tariffs would push CPI and PCE higher and bought the greenback on expectations that the Fed would keep rates elevated. This helps explain why the Fed is now more focused on the labor market than on inflation. Further cooling in December would increase the likelihood of monetary easing and put additional pressure on the dollar.
Weekly EURUSD Trading Plan
Investors were reluctant to add to short trades in the EUR/USD pair ahead of key data releases. As a result, the euro moved back to prior levels. If the asset settles above 1.171, it will be a bullish signal. More risk-tolerant traders may consider buying the euro, while others may prefer to wait for the nonfarm payrolls release.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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