EURUSD Corrects Amid Rising EU-US Trade War Fears.
The EURUSD currency pair has faced downward pressure, correcting to near 1.0860 in European trading hours. Investor sentiment has turned cautious due to fears of an escalating trade war between the European Union (EU) and the United States (US). Recent comments from US President Donald Trump about retaliatory tariffs have added to market uncertainty, impacting the Euro and supporting the US Dollar as a safe-haven asset.
Trade Tensions Escalate
Trump’s Tariff Threats
On Wednesday, President Trump vowed to respond to the EU’s proposed counter-tariffs on $26 billion worth of US goods. His comments came ahead of a meeting with Irish Prime Minister Micheál Martin, where he highlighted trade imbalances and accused Ireland and other countries of taking advantage of the US economy.
European Response
The European Commission (EC) has acted swiftly in response to US steel and aluminum tariffs. EC President Ursula von der Leyen announced “swift and proportionate countermeasures” on US imports, further escalating tensions. The US imposed a blanket 25% tariff on steel and aluminum imports, which took effect on Thursday.
Impact on Germany
Germany, as the largest Eurozone exporter to the US, is particularly vulnerable to a trade war. Bundesbank President Joachim Nagel warned that these tariffs could push Germany into a recession this year. This has further weighed on investor sentiment, leading to a decline in EURUSD.
Germany’s Debt Restructuring Plan
Meeting of German Leaders
Amid trade war fears, Germany is also facing internal economic challenges. Investors are awaiting a meeting of German leaders to discuss debt restructuring. The objective is to boost defense spending and stimulate economic growth.
Political Negotiations
The lower house of Parliament is expected to clear the debt reforms on Tuesday. The negotiations involve key political figures such as Green Party leader Franziska Brantner, likely next Chancellor Friedrich Merz, and Social Democratic Party (SPD) co-leader Lars Klingbei. The outcome of these discussions could influence market sentiment toward the Euro.
Inflationary Expectations
The Euro has recently gained strength as investors anticipate that Germany’s debt restructuring plan will be inflationary. If inflation rises, it could lead traders to reduce their dovish expectations for the European Central Bank (ECB), potentially supporting the Euro in the longer term.
Market Movers Affecting EURUSD
US Dollar Gains on Trade War Fears
The US Dollar has found some support as trade war fears push investors toward safe-haven assets. The US Dollar Index (DXY), which tracks the Greenback against six major currencies, has edged up to near 103.65, although it remains close to its four-month low of 103.20.
Cooling Inflation Limits USD Gains
Despite trade tensions, the upside for the US Dollar remains limited due to signs of slowing inflation. In February, both headline and core inflation in the US decelerated more than expected.
Headline CPI (Year-over-Year): 2.8% (vs. previous 3.0%)
Core CPI (Year-over-Year): 3.1% (vs. previous 3.3%)
Month-over-Month CPI Growth: 0.2% (vs. expected 0.3%)
These figures indicate that inflationary pressures are cooling, which could increase expectations for Federal Reserve (Fed) rate cuts in the coming months.
Fed Rate Cut Expectations
According to the CME FedWatch tool, there is a 78% probability that the Fed will cut interest rates in its June meeting. A softer inflation outlook increases the chances of monetary easing, which could weigh on the US Dollar in the longer term.
Key Events to Watch
Fed Policy Meeting (March 18-19)
The Federal Reserve’s upcoming two-day monetary policy meeting will be closely watched. The central bank is widely expected to keep rates steady within the 4.25%-4.50% range. However, market participants will be paying close attention to Fed Chair Jerome Powell’s guidance on inflation and the economic outlook under Trump’s administration.
US Producer Price Index (PPI) Release
Later on Thursday, investors will focus on the US Producer Price Index (PPI) data for February, scheduled for release at 12:30 GMT. A weaker-than-expected PPI reading could reinforce expectations of a Fed rate cut, potentially weakening the US Dollar and supporting EURUSD.
Technical Outlook for EURUSD
Key Support and Resistance Levels
Support: 1.0830, 1.0800
Resistance: 1.0900, 1.0950
EURUSD is facing downward pressure but remains above key support levels. A break below 1.0830 could signal further declines, while a move above 1.0900 could revive bullish momentum.
Market Sentiment
Investor sentiment remains fragile due to the ongoing trade war concerns and expectations for monetary policy changes. The short-term direction of EURUSD will largely depend on how trade tensions evolve and the upcoming Fed meeting.
Conclusion
The EURUSD pair is facing volatility amid fears of a potential trade war between the EU and the US. Trump’s tariff threats and the European Commission’s countermeasures have heightened market uncertainty. At the same time, Germany’s debt restructuring plan could influence Euro strength, depending on its inflationary impact.
While the US Dollar has gained ground as a safe-haven asset, its upside is capped due to softer inflation data and expectations of Fed rate cuts. Key events to watch include the upcoming Fed policy meeting and US PPI data. Investors should remain cautious as geopolitical and economic developments unfold in the coming weeks.
