EUR/USD corrects slightly amid fears of potential EU-US trade war

EUR/USD falls slightly to near 1.0860 as investors turn cautious over the EU-US trade relationship outlook.

US President Trump threatens to respond to EU’s proposed counter-tariffs.

Investors await the meeting of German leaders on a debt restructuring plan.

EUR/USD corrects to near 1.0860 in European trading hours on Thursday. The major currency pair drops as the Euro (EUR) faces slight pressure on fresh escalation in potential tariff war between the European Union (EU) and the United States (US).

On Wednesday, US President Donald Trump said that he will respond to counter-tariffs proposed by the EU on 26 billion Euro worth of US goods. Trump’s comments came just before the meeting with Irish Prime Minister Micheál Martin, after which he said that “there’s a massive deficit that we have with Ireland and with other countries” and added he will impose reciprocal tariffs on them for taking advantage of the US.

During the European trading hours on Wednesday, European Commission (EC) President Ursula von der Leyen launched 'swift and proportionate countermeasures' on US imports in the EU in response to steel tariffs. Trump announced a 25% tariff blanket on imports of steel and aluminum, which has come into effect on Thursday.

The trade war between the shared continent and the US will impact heavily on the German economy, knowing that it is the largest exporter of the Eurozone to the US. In European trading hours on Thursday, the European Central Bank (ECB) policymaker and Bundesbank President Joachim Nagel warned that US trade tariffs on the European Union (EU) could push “Germany into recession this year” in an interview with BBC News.

Meanwhile, trades are also cautious ahead of the meeting of German leaders to discuss the debt restructuring to boost defense spending and stimulate economic growth. German debt reforms are expected to get cleared in the lower house of Parliament on Tuesday as Franziska Brantner-led-German Green Party agreed to negotiate with likely next Chancellor Friedrich Merz and Social Democratic Party’s (SDP) co-leader Lars Klingbei.

The Euro has outperformed lately as investors expect the German debt restructuring plan will be inflationary for the economy. Such a scenario would force traders to pare European Central Bank (ECB) dovish bets. 

Daily digest market movers: EUR/USD ticks lower as US Dollar steadies despite cooling US inflation

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• The US Dollar strives to gain ground as US President Trump’s tariff fears have lifted demand for safe-haven assets. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, gains marginally to near 103.65 but is still in sight of its four-month low of 103.20.

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• The upside in the Greenback remains capped as US inflationary pressures have cooled down faster than expected in February. In the 12 months to February, the US headline and core CPI decelerated to 2.8% and 3.1%, respectively. Month-on-month headline and core CPI grew by 0.2%, slower than estimates of 0.3%. Signs of taming inflationary pressures bode poorly for the US Dollar as they force traders to raise bets supporting the Federal Reserve (Fed) to ease monetary policy. According to the CME FedWatch tool, there is a 78% chance that the Fed will cut interest rates in the June meeting.

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• Going forward, the next major trigger for the US Dollar will be the two-day Fed’s monetary policy meeting on March 18-19. The central bank is almost certain to keep interest rates steady in the range of 4.25%-4.50%. Investors will pay close attention to the Fed’s guidance on inflation and the economic outlook under the leadership of Donald Trump.

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• In Thursday’s session, investors will focus on the US Producer Price Index (PPI) data for February, which will be published at 12:30 GMT.

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Technical Analysis: EUR/USD drops from five-month high of 1.0950

EUR/USD drops to near 1.0860 on Thursday, extending correction after posting a fresh five-month high near 1.0950 on Tuesday. The pair strengthened after a decisive breakout above the December 6 high of 1.0630 on March 5. The long-term outlook of the major currency pair is bullish as it holds above the 200-day Exponential Moving Average (EMA), which trades around 1.0650.

The 14-day Relative Strength Index (RSI) wobbles near 75.00, suggesting a strong bullish momentum.

Looking down, the December 6 high of 1.0630 will act as the major support zone for the pair. Conversely, the psychological level of 1.1000 will be a key barrier for the Euro bulls.