EUR/USD rallies as Trump’s reciprocal tariffs hit US Dollar hard
- EUR/USD soars above 1.1000 as the US Dollar has been hit hard by Trump’s reciprocal tariffs announcement.
- US President Trump has announced 20% reciprocal levies on the Eurozone.
- EC von der Leyen vows to retaliate if negotiations with Washington fail.
EUR/USD soars above the psychological figure of 1.1000 in Thursday’s European session. The major currency pair strengthens as the US Dollar (USD) takes the bullet for long-term transition in the United States (US) economy. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, nosedives to near 102.00, the lowest level seen in almost six months.
On Wednesday, US Council of Economic Advisers Chair Stephen Miran agreed that tariffs announced by US President Donald Trump could lead to short-term bumps in the economy but will be favorable for long-term prospects. His comments came after Trump unveiled planned reciprocal tariffs. Trump announced a 10% baseline duty on all imports to the US and additional specific levies on most of its trading allies. Some leaders from targeted nations have threatened to retaliate with countermeasures.
Market participants expect Trump's tariffs will lead to a global economic slowdown, including in the US. Experts believe that new import duties are higher than expected and sufficient to send the US economy into a recession. Such a scenario paves the way for stagflation, assuming that higher levies will dampen efforts made by the Federal Reserve (Fed) to contain sticky inflationary pressures. This will complicate the Fed’s job of maintaining inflation near the 2% target with full employment.
Going forward, investors will focus on the US Nonfarm Payrolls (NFP) data for March, which will be released on Friday. The official employment data will influence market expectations for the Fed’s monetary policy outlook. On Wednesday, the ADP Employment Change data showed that the private sector added 155K fresh workers in March, significantly higher than the expectations of 105K and the former release of 84K.
In Thursday’s session, investors will pay close attention to the S&P Global and the ISM Services Purchasing Managers Index (PMI) data for March, which will be published during North American trading hours. The S&P Global Services PMI is estimated to align with the preliminary reading of 54.3. The ISM Services PMI is expected to come in lower at 53.0 from February’s reading of 53.5, suggesting that activities in the services sector grew moderately.
Daily digest market movers: EUR/USD strengthens despite ECB Stournaras supports more interest rate cuts
- Sheer strength in the EUR/USD pair is also driven by outperformance from the Euro (EUR). The shared currency strengthens even though fears of a potential trade war between the US and the Eurozone have escalated after Trump announced 20% reciprocal tariffs on the European Union (EU).
- European Commission (EC) President Ursula von der Leyen stated that the consequences will be “dire for millions of people around the globe”. She warned that the old continent is prepared to retaliate with countermeasures if negotiations with Washington end without a healthy conclusion. Von der Leyen further added that the EC is already finalising the “first package of countermeasures” in response to tariffs on steel and is now preparing for further countermeasures to protect our “businesses and interests”.
- Last month, von der Leyen warned of imposing tariffs on up to 26 billion Euros worth of imports from the US as a countermeasure for Trump's sweeping 25% levies on steel and aluminum imports, which became effective on March 12.
- Meanwhile, European Central Bank (ECB) officials have ruled out expectations that tariff-driven inflation could dent hopes of more interest rate cuts. During European trading hours, ECB policymaker and Governor of Bank of Greece Yannis Stournaras said that US tariffs will not be an “obstacle to April rate cut” as the inflation path remains “unchanged”. Stournaras guided that US tariffs will “negatively impact” the Euro area Gross Domestic Product (GDP) growth rate by “0.3%-0.4%” in the first year.
Technical Analysis: EUR/USD gains sharply to near 1.1030
EUR/USD rallies to near 1.1030 on Thursday after a decisive breakout above the prior resistance of 1.0955, trading at levels not seen since early October. The near-term outlook of the major currency pair has turned extremely bullish as the 20-day Exponential Moving Average (EMA) resumes its upside journey, trading around 1.0800.
The 14-day Relative Strength Index (RSI) jumps around 70.00 after cooling down to near 60.00, suggesting that the bullish momentum has resumed.
Looking down, the mid-March resistance zone around 1.0955 is the first support to consider, followed by the March 31 high of 1.0850. Conversely, the September 25 high of 1.1214 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.