Four Key Risks to EUR/USD Outlook Amid Shifting Geopolitics and Growth Prospects

Four main risks associated with our scenario 

1 - Will the Fed turn more hawkish? Faced with the risk that inflation will accelerate due to the customs tariffs, which is what is suggested by year-ahead inflation expectations in the latest University of Michigan survey, the Fed could pause its monetary easing. As yet, however, inflation is continuing to slow and the market seems to react more to concerns over growth. The risk is therefore slight. 

2 - Will European defence spending plans really stimulate growth? The implementation of plans to rearm Europe could prove a long-drawn process and turn out to be insufficient to bolster European growth. To avoid these pitfalls, the European authorities have set themselves a four-year deadline for the implementation of the ReArm Europe plan. At the same time, Germany’s €500bn public spending plan over 10 years should have stimulative effects, albeit limited this year. All these measures ought to shore up business confidence. 

3 – Will there be an escalation of Trump’s trade war with the European Union? Watch out notably, on 2 April, for eventual decisions by Trump regarding the application of reciprocal tariffs. This could weigh on European growth and, accordingly, on the euro. However, this risk is already partly priced in. 

4 – What if Russia and Ukraine fail to reach a peace agreement? This would translate into higher oil and gas prices and a deterioration in business sentiment. This risk does, however, appear slight as the latest developments seem to open the way towards a peace agreement. 

Given this new environment, our scenario for the EUR/USD has been revised, now being for the pair to test 1.10 in the short term and 1.12 in the second half, bearing in mind that European growth should improve whereas US growth could disappoint.