EURUSD Drops Amid Trump’s Tariff Threats and Economic Uncertainty.
The EURUSD pair has come under significant pressure, trading below the 1.0500 psychological level in European trading hours. The decline primarily driven by US President Donald Trump’s renewed threats to impose 25% tariffs on cars and other imports from the Eurozone. This development has not only strengthened the US Dollar (USD) as a safe-haven currency but has also intensified concerns over the already fragile economic landscape in the Eurozone (EU).
At the same time, traders are closely watching upcoming economic data releases, including the US PCE inflation data for January and the preliminary HICP inflation data for major Eurozone nations, both scheduled for Friday. The outcome of these reports will play a crucial role in shaping expectations around monetary policy decisions by both the Federal Reserve (Fed) and the European Central Bank (ECB).
Trump’s Tariff Threats Shake Markets
On Wednesday, President Donald Trump reiterated that his administration plans to impose 25% tariffs on automobiles and other imports from the EU. However, he did not specify a timeline for the implementation of these tariffs. This announcement sent shockwaves through financial markets, as investors assessed the potential impact of a renewed trade war between the US and the Eurozone.
A European Commission (EC) spokesperson responded swiftly, stating that the EU will react “firmly and immediately against unjustified barriers to free and fair trade.” The EU has long criticized Trump’s tariff policies, arguing that they undermine the principles of free trade and disproportionately target European industries.
If these tariffs imposed, they could have severe consequences for the Eurozone economy, which is already grappling with weak consumer demand, sluggish GDP growth, and persistent inflationary pressures. Automobile exports are a significant component of the EU’s trade with the US, and tariffs on this sector would hurt major European automakers such as Volkswagen, BMW, and Mercedes-Benz.
Additionally, a trade war with the US could deter business investment, further slowing economic growth in the region. The Euro (EUR) is particularly sensitive to geopolitical risks and trade disruptions, making it vulnerable to further downside pressure.
US Dollar Gains as a Safe Haven, but Upside Limited
The US Dollar Index (DXY), which measures the value of the USD against a basket of major currencies, has remained strong as investors seek safety amid global uncertainties. The dollar’s safe-haven appeal has increased following Trump’s tariff threats, leading to a sell-off in risk-sensitive assets, including the Euro.
However, while the USD remains strong, its upside potential somewhat capped due to growing expectations that the Federal Reserve (Fed) will cut interest rates in June.
- The CME FedWatch tool suggests that there is now a 68% probability that the Fed will lower interest rates in June.
- A decline in US service sector activity, as indicated by the flash S&P Global Purchasing Managers Index (PMI) report for February, has reinforced expectations of monetary easing.
- Consumer confidence has also weakened sharply, adding to concerns that the Fed may need to shift towards a more accommodative stance to support economic growth.
Market participants are closely watching the upcoming US Personal Consumption Expenditures (PCE) Price Index data for January, which will be released on Friday. The PCE is the Fed’s preferred inflation gauge, and its outcome could influence expectations regarding future interest rate decisions.
If inflation comes in lower than expected, it would reinforce bets that the Fed will cut rates sooner rather than later, putting pressure on the USD. Conversely, strong inflation data could push the Fed to maintain a “higher-for-longer” stance, supporting the greenback and further weighing on EURUSD.
Eurozone Faces Multiple Challenges
Aside from the threat of US tariffs, the Eurozone is dealing with a range of domestic challenges that are weighing on the Euro.
1. Political Uncertainty in Germany
Germany, the largest economy in the Eurozone, is currently facing political uncertainty as efforts to form a coalition government continue. The conservative Christian Democratic Union (CDU), led by Friedrich Merz, is expected to form a government with the Social Democratic Party of Germany (SPD), which was led by outgoing Chancellor Olaf Scholz.
Markets remain cautious as the new government’s economic policies will play a key role in determining Germany’s future economic trajectory. Bundesbank President Joachim Nagel recently emphasized the need for the German government to address “structural faults” in the economy to improve competitiveness and economic stability.
2. Eurozone Inflation Data in Focus
Investors are awaiting the release of flash inflation data for Germany and its six states, France, and Italy, which is scheduled for Friday. This data will provide insights into the inflation trajectory in the Eurozone, influencing expectations regarding the European Central Bank’s (ECB) monetary policy outlook.
- If inflation remains high, the ECB may be forced to maintain a restrictive monetary policy stance for longer, which could provide some support for the Euro.
- However, if inflation declines significantly, it could increase the likelihood of ECB rate cuts in the second half of 2025, further weighing on the EUR/USD pair.
Currently, the ECB is struggling to balance inflation control with economic growth concerns. Policymakers remain cautious about cutting rates too soon, as inflation is still above the central bank’s 2% target.
Technical Outlook: EURUSD Faces Downside Risk
From a technical analysis perspective, the EUR/USD pair remains under pressure:
- Resistance Levels: 1.0500 (psychological level), 1.0550 (short-term resistance).
- Support Levels: 1.0460 (recent low), 1.0420 (next support zone).
If EURUSD breaks below 1.0460, the next key support level to watch will be 1.0420, which could open the door for further downside towards 1.0350.
On the upside, if the pair manages to recover above 1.0500, it could see some relief, but significant resistance awaits at 1.0550.
Conclusion: Euro Faces Bearish Pressure Amid Market Uncertainty
The EURUSD pair remains under bearish pressure as markets react to:
- Trump’s renewed tariff threats on the Eurozone, which could harm European exports and economic growth.
- The US Dollar’s strength as a safe-haven asset, driven by uncertainty and risk aversion.
- Political uncertainty in Germany, which adds to concerns about Eurozone stability.
- Expectations of future Fed rate cuts, which could eventually limit the upside potential of the USD.
- Upcoming inflation data in both the US and Eurozone, which will be crucial for shaping the Fed’s and ECB’s next policy moves.
Looking ahead, traders should closely monitor the PCE inflation data on Friday, as well as Eurozone inflation numbers, which could set the tone for EUR/USD’s next move. If economic data remains weak, EUR/USD could continue its downward trajectory towards 1.0400 or lower. However, any positive surprises in inflation or economic growth data could help the Euro recover some ground.
For now, the risks remain tilted to the downside, and traders should approach the market with caution as global economic and political uncertainties continue to drive volatility in currency markets.
