Investors have shifted from the "Sell America" strategy that emerged after the White House imposed tariffs to "Buy America" amid positive developments in U.S.-China trade relations. While the S&P 500 began climbing as early as April, the dollar held back until the last moment, waiting for the outcome of talks between Washington and Beijing. Only then did EUR/USD bears launch a rapid offensive.

Before his team's visit to Switzerland, Donald Trump suggested that reducing tariffs on China to 80% would be a fair solution. Rumors in the market suggested rates could drop to 60%, but nobody expected a reduction to 30%. Nonetheless, tariffs on U.S. imports fell from 145% to 30%, and on Chinese goods from 125% to 10%. Though the ceasefire is limited to 90 days, Scott Bessent noted that the truce could be extended.

The worst fears that prompted dollar sell-offs—recession concerns—were pushed aside, and EUR/USD quickly moved downward. Investors also recalled how the same Treasury Secretary emphasized the importance of a strong greenback, and how Donald Trump abandoned the idea of firing Jerome Powell as Fed Chair to avoid harming the U.S. currency.

Performance of the Euro vs. the U.S. Dollar Year-to-Date

This shift in tone from the White House has another motive. EUR/USD has had its strongest start to a year since 2003, driving down the USD Index and heightened inflation risks. On the flip side, excessively high prices increase the likelihood that the Fed will maintain its current federal funds rate, which should support the dollar.

At least, that's the view of Credit Agricole, which has joined the bearish camp on EUR/USD. According to the bank, rumors about the U.S. dollar losing its status as the world's primary reserve currency are greatly exaggerated. Additionally, the loosening of financial conditions supports U.S.-issued assets and gives the Fed room to delay restarting its monetary easing cycle.

Performance of Global vs. U.S. Equities

Still, the flow of capital out of the U.S. toward other countries in the name of portfolio diversification cannot be easily stopped. Over the past decade, money has overwhelmingly flowed from Europe to North America. But with Donald Trump's return to the White House, the 47th president's imposition of broad tariffs, and Germany's fiscal stimulus, European stock indices are beginning to outperform U.S. ones, benefiting the euro.

For the first time in three years, the 12-month risk of a reversal in the major currency pair (EUR/USD) has exceeded the 1-month risk, signaling the durability of the upward trend.

EUR/USD forms a "Spike and Ledge" pattern on the daily chart. Holding on to the short positions opened from 1.128 and 1.1225 makes sense. Their fate hinges on the test of support at the pivot level of 1.1165. A breakout would justify adding to the shorts; a rebound would signal to flip the position and go long.