13.05.202501:01 Forex Analysis & Reviews: EUR/USD. The Dollar Is Back in the Saddle. But for How Long?

The greenback is back on top: the U.S. Dollar Index hit a four-week high on Monday, responding to the announcement of a three-month truce in the trade war between the United States and China. The dollar strengthened across all major pairs, including EUR/USD. Since early April, EUR/USD bears tested the 1.10 zone for the first time, falling more than 150 points within a few hours. And judging by the general euphoria among dollar bulls, the greenback will continue attempting to assert itself in the near term, driven by the long-awaited thaw in U.S.-China relations. The question now is how long this euphoria will last. The initial excitement about the start of negotiations will eventually give way to concerns regarding the outcome and duration of these talks. And given the historical background, there's every reason for "cautious pessimism."

Let's start with the developments in Geneva, where the United States temporarily reduced tariffs on Chinese goods from 145% to 30%, and China responded by cutting tariffs on U.S. goods from 125% to 10%. Both sides reduced tariffs and agreed to create a "mechanism for continued dialogue on economic and trade relations." In other words, they decided to keep negotiating—in China, the U.S., or a third country (as was the case now in Switzerland). The Geneva meeting thus became a prologue to a full-scale negotiation process. As a "gesture of goodwill," both countries mutually eased tariff pressure by a combined 115% for 90 days.

However, this doesn't mean that the U.S. and China are bound to reach an agreement within that timeframe—there is no hard deadline. Recall that during Trump's first presidency, in 2018, the U.S. and China also held negotiations and even found some compromises, only for escalation to follow shortly after. Talks dragged on for over 18 months, with the first phase of a trade deal only signed in January 2020.

Of course, this doesn't necessarily mean the current negotiation process will stretch for months. But it would be unwise to expect a quick deal either. Judging by the dollar bulls' (arguably overblown) reaction, many seem confident that a happy ending is just around the corner.

And that's where the danger lies for the greenback—because the "hangover" from Monday's euphoria could be severe.

It is important to note that the U.S. has not officially concluded any trade agreements, despite the major tariffs being implemented over a month ago. The only exception is the agreement with the U.K., which, firstly, only represents a basic framework (details are still being finalized), and secondly, even with concessions from the White House, British goods will still face 10% tariffs—despite the U.S. having a trade surplus with the U.K. This is significant in light of Trump's recent claim that countries with trade surpluses "should expect tariffs well above 10%."

Perhaps this explains why negotiations with South Korea, India, Vietnam, and Japan (reportedly nearing completion) and talks with the EU have stalled. And likely for the same reason, Washington won't reach a "quick deal" with China.

As for the newly announced 90-day trade truce, it's also important to highlight that the "preferential regime" does not apply to sector-specific tariffs introduced in March against all U.S. trading partners. Nor does it roll back tariffs imposed on China during Trump's first term.

So what does all this mean? On the one hand, Monday's general dollar strengthening is well-founded. The negotiation process has restarted, tariffs have been eased, and both sides have exchanged conciliatory statements. Recession fears in the U.S. have diminished, and demand for the dollar has risen. In the short term, this favors the greenback. However, once the initial excitement fades and U.S.-China talks become mired in negotiating core issues, the dollar could be vulnerable again.

Note that EUR/USD bears could not hold within the 1.10 zone during this downside impulse—the first attempt failed. The 1.1110 support level (the lower Bollinger Band on the four-hour chart) proved too strong for the bears—they couldn't settle below it. Therefore, short positions should only be considered after a confirmed break of this barrier (if that happens). Otherwise, EUR/USD buyers may seize the initiative (at least as a corrective move) and attempt to return to the 1.12 zone.