EUR/USD trades cautiously as investors assess consequences of Trump’s tariffs
- EUR/USD falls back to near 1.0400 as the US Dollar gains ground amid concerns over global economic growth with Trump’s tariffs.
- ECB President Lagarde has advised that Europe should be prepared to respond to Trump’s tariff hikes.
- The Fed and the ECB are set to announce their first monetary policy decision of 2025 next week.
EUR/USD ticks lower to near 1.0400 in Thursday’s European session as the US Dollar (USD) gains ground. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its recovery to near 108.40 from the two-week low of 107.75 posted on Wednesday. The Greenback bounces back as the market sentiment turns slightly cautious, with investors assessing the consequences of United States (US) President Donald Trump’s tariffs on economic growth.
Trump has threatened 25% tariff hikes on Canada and Mexico and 10% on China, which will come into effect on February 1. He also plans to impose tariffs on Europe after accusing the bloc of being "very, very bad to us". Trump’s tariff hike approach appears to be more gradual than what market participants had anticipated. However, they would still be unfavorable to global economic growth.
On Wednesday, European Central Bank (ECB) President Christine Lagarde commented on CNBC that Trump’s decision not to swiftly impose tariffs was a "smart approach" because blanket levies don’t necessarily give you the “results that you expect." Lagarde warned that Europe must “anticipate what will happen” and be “prepared in order to respond,” as Trump’s tariffs would be “selective” and “focused.”
Daily digest market movers: EUR/USD ticks lower ahead of Eurozone-US flash PMI for January
- EUR/USD edges lower on Thursday, with investors focusing on flash private Eurozone and the US Purchasing Managers Index (PMI) data for January, which will be published on Friday. Eurozone HCOB PMI report, compiled by S&P Global, is expected to show that overall business activity continued to contract but at a slower pace. The HCOB Composite PMI is estimated to come in slightly higher at 49.7, compared to 49.6 in December.
- On the US front, economists expect overall business activity to have expanded almost at a steady pace. Activities in the manufacturing sector are estimated to have contracted again but at a slower pace. Meanwhile, the service sector activity is expected to expand moderately.
- Investors should also brace for significant volatility in the next week as the Federal Reserve (Fed) and the ECB will announce their first monetary policy decisions this year. The Fed is certain to keep interest rates in the range of 4.25%-4.50%, according to the CME FedWatch tool. Meanwhile, traders have fully priced in a 25-basis points (bps) interest rate reduction by the ECB.
- Traders also expect the ECB to cut its Deposit Facility rate in each of its next four policy meetings. ECB policymaker and Finnish central bank governor Olli Rehn said on Wednesday that he is now confident that “inflation will stabilize at the target as predicted” and monetary policy will “stop being restrictive” in the near future. However, he refrained from endorsing market expectations and argued that policy decisions will be determined meeting by meeting.
Technical Analysis: EUR/USD faces pressure around 1.0460
EUR/USD struggles to extend its recovery above the immediate resistance of 1.0460, which was initiated from a two-year low of 1.0175 reached on January 13. The major currency pair bounced back after a divergence in momentum and price action. The 14-day Relative Strength Index (RSI) formed a higher low, while the pair made lower lows.
The near-term outlook of the shared currency pair has improved as it holds above the 20-day Exponential Moving Average (EMA), which trades around 1.0360. Meanwhile, the longer-term outlook is still bearish as the 200-day EMA at 1.0700 is sloping downwards.
Looking down, the January 13 low of 1.0175 will be the key support zone for the pair. Conversely, the psychological resistance of 1.0500 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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