EUR/USD slumps as ECB Lagarde warns of potential Eurozone economic shocks
- EUR/USD falls to near 1.0860 as ECB Lagarde expects US President Trump-led trade war could slowdown the Eurozone economic growth.
- The Fed kept borrowing rates steady and stuck to their two interest rate cut in 2025 forecasts on Wednesday.
- The Fed expects Trump’s policies to weigh on US economic growth and accelerate price pressures.
EUR/USD declines to near 1.0860 in European trading hours on Thursday. The major currency pair drops as the Euro (EUR) faces pressure after European Central Bank (ECB) President Christine Lagarde warned of Eurozone economic risks due to potential tariffs by the United States (US).
Lagarde testified before the Committee on Economic and Monetary Affairs of the European Parliament during European trading hours on Thursday. She said that US tariffs of 25% on imports from Europe, as threatened by US President Donald Trump, would lower “Euro area growth by about 0.3% in the first year”, according to an ECB analysis. The study also shows that retaliatory tariffs from Europe would further increase this to about 0.5%.
Fears of soft Eurozone economic growth would dampen the Euro’s (EUR) appeal as it will force the ECB to lower interest rates further. However, Germany’s end to over a decade-long fiscal conservatism, aiming to boost domestic consumption and defense spending, would offset the impact of the trade war.
On the inflation outlook, Christine Lagarde forecasted that retaliatory measures from the European Union (EU) and a weaker Euro exchange rate could lift inflation by around 0.5%. However, the ECB President expects that to be temporary as the effect would ease in the medium term due to “lower economic activity dampening inflationary pressures”.
Daily digest market movers: EUR/USD drops as US Dollar gains
- EUR/USD slides below 1.0900 as the US Dollar (USD) strengthens, while investors digest the muddy United States economic outlook under the leadership of President Donald Trump, anticipated by the Federal Reserve (Fed). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rose to near 103.65.
- On Wednesday, the Fed left key borrowing rates unchanged in the range of 4.25%-4.50%, as expected, for the second time in a row and stuck to their guidance of two interest rate cuts this year as projected in the December policy meeting. The Fed expressed no rush for monetary policy adjustments amid “unusually elevated” uncertainty on the President’s policies. “We are not going to be in any hurry to move on rate cuts,” Fed Chair Jerome Powell said in the press conference as “tariffs tend to bring growth down and inflation up.”
- The Fed revised their forecast for the core Personal Consumption Expenditures Price Index (PCE) for this year to 2.8%, up from the 2.5% projected in the December meeting. The central bank revised this year's Gross Domestic Product (GDP) growth lower to 1.7% from their previous forecast of 2.1% despite remaining confident that labor market conditions are solid.
- Contrary to the Fed’s “wait and see approach”, US President Trump said that the central bank should have cut interest rates as the impact of tariffs is transiting into the economy. “The Fed would be much better off cutting rates as US tariffs start to transition (ease!) their way into the economy. Do the right thing,” Trump said in a post on Truth Social after the Fed’s policy decision. Trump has been advocating lower interest rates to ramp up economic growth.
Technical Analysis: EUR/USD corrects to near 1.0860
EUR/USD falls to near 1.0860 after failing to hold the key level of 1.0900 on Thursday. However, the long-term outlook of the major currency pair is still bullish as it holds above the 200-day Exponential Moving Average (EMA), which trades around 1.0660.
The pair strengthened after a decisive breakout above the December 6 high of 1.0630 on March 5.
The 14-day Relative Strength Index (RSI) cools down after turning overbought around 75.00, suggesting that the bullish momentum has moderated, but the upside bias is intact.
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 the key barrier for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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