Synopsis:

MUFG expects the recent EUR/USD rally to be short-lived, with tariff risks set to limit further upside. While political developments in Germany provided a temporary boost, Trump’s aggressive stance on EU tariffs and rebounding US yields suggest EUR/USD could struggle to sustain gains.

Key Points:

1️⃣ German Fiscal Deal Gave EUR a Boost 🇩🇪

• The CDU-CSU and SPD agreement on defense and infrastructure spending lifted EUR sentiment.
• Late-session momentum made EUR the best-performing G10 currency.

2️⃣ Tariff Risks Still Loom Over the EU 🌍

• Trump explicitly mentioned the EU as a target for new tariffs.
• While his trade policy remains fluid, further action seems likely.

3️⃣ US Yields Rebounding, Supporting USD 💵

• Rising US yields reduce the attractiveness of EUR/USD upside.
• A stronger USD on the back of rate differentials could weigh on EUR.

4️⃣ Positioning Not a Major Driver 🚨

• Leveraged funds remain short EUR, but positioning is not extreme.
• This suggests limited scope for further short covering to push EUR/USD higher.

Conclusion:

MUFG sees limited room for further EUR/USD gains, as tariff threats and higher US yields outweigh recent bullish sentiment. While positioning is not overly short, fundamental risks suggest EUR upside will be capped in the near term.