Thursday’s European business hours saw the EUR/USD exchange rate rise to around 1.0770. As the US Dollar Index (DXY) retreats from its three-week peak of 104.65, the major currency pair appreciates following a six-day losing run. Donald Trump, the president of the United States (US), has threatened to slap high tariffs on Canada and the Eurozone for allegedly planning to undermine the US economy, making the outlook for the Euro (EUR) precarious.
Trump stated in a post on Truth Social that “the best friend that each of those two countries has ever had will be protected if the European Union (EU) collaborates with Canada to inflict economic harm on the USA through the imposition of large-scale tariffs, far larger than currently planned.”
The situation has raised concerns about a terrifying trade war between the US and the Eurozone, which would cause both nations’ economies to slow down.
Pierre Wunsch, the governor of the Belgian central bank and a policymaker for the European Central Bank (ECB), stated in a CNBC interview that tariffs will hinder economic development and increase inflationary pressures in response to Trump’s extensive tariff threats. Wunsch stated that “inflation risks might be on the upside,” but he did not predict that interest rates will rise this year. “A rate-cut pause in April should be on the table,” Wunsch continued. On the contrary, as economic threats from the Trump-led tariff war increase, traders are growing more optimistic that the ECB will lower interest rates once again at its meeting in April.
Donald Trump said earlier in the day that the import of cars and auto parts will be subject to 25% tariffs starting on April 2. Trump’s car tariffs will have a significant negative impact on the German economy, as 13% of its total vehicle exports go to the US.
EUR/USD bounces back at the expense of the US Dollar.
- After correcting throughout the previous six trading sessions, EUR/USD rises again. Despite US President Donald Trump’s tariffs on vehicle imports, the pair is attracting offers as the USD corrects. Market participants anticipate that Trump’s tax program will have a negative short-term impact on the domestic economy.
- Costly goods entering the US will have an impact on importers, who will be forced to pass those costs on to customers. The economy will experience inflation in such a situation, which would reduce family buying power.
- Trump’s tariffs have made the Fed’s (Fed) job more difficult. The Fed would have to strike a balance between the need for an expansionary policy and concerns about slower economic development, since the prospect of greater inflation may compel the central bank to retain a restrictive monetary policy stance. At the Detroit Lakes Chamber Economic Summit on Wednesday, Minneapolis Fed Bank President Neel Kashkari stated that the factors work together as “a wash.” It is his opinion that the Fed should “just sit where we are for an extended period of time until we get clarity.”
- The CME FedWatch tool indicates that there is a 65.5% likelihood of a rate cut in June, although the Fed is certain to maintain interest rates in the present range of 4.25% to 4.50% during the May policy meeting.
- The US Personal Consumption Expenditure Price Index (PCE) data for February, which is scheduled for release on Friday, will be the primary catalyst for the US dollar going ahead. Compared to the 2.6% increase in January, economists anticipate that the US core PCE inflation rate—the Fed’s favoured inflation indicator—will have increased at a higher rate of 2.7% year over year.
