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21 Jan 2025
EUR/USD declines as Trump keeps tariff hike plans
- EUR/USD corrects lower after revisiting a two-week high of 1.0430 as the US Dollar pares some of Monday’s losses.
- The US Dollar rebounds as Donald Trump confirms that the tariff hike plan remains afloat.
- Trump aims to fix the trade imbalance with Europe, which would keep the Euro on the backfoot.
EUR/USD corrects lower to near 1.0350 in Tuesday’s European session after surging to 1.0430 on Monday. The major currency pair faces pressure on Tuesday as the US Dollar (USD) pares some of Monday’s losses. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, bounces back around 108.50 from its almost two-week low slightly below 108.00.
The Greenback dived vertically on Monday as Donald Trump’s presidential memo lacked immediate tariff imposition on foreign countries. The memo was directing federal agencies to study trade policies and evaluate US trade relationships with China and America’s continental neighbors, the Wall Street Journal (WSJ) reported.
Donald Trump clarified that the proposal of universal tariff hikes is on the table but “we are not ready for that yet”. However, he highlighted the sizeable trade deficit issue with the Eurozone. Trump said that he would remedy the trade imbalance either by “raising tariffs or Europe buying more US oil and gas”, Reuters reported.
The absence of tariff hikes by in Trump's comments on his first day at the White House led to a strong buying in risk-sensitive currencies. The Euro (EUR) rallied almost 1.3% against the US Dollar despite fears of higher tariffs remaining intact.
Daily digest market movers: EUR/USD falls back below 1.0400 amid firm ECB dovish bets
- EUR/USD fails to sustain above the key level of 1.0400 due to a slight recovery in the US Dollar. Market participants are divided over US Dollar’s outlook as Trump has delayed tariff orders. The Greenback had a strong run-up in the last three months as investors feared that Trump would probably slap hefty tariffs soon after returning to the White House.
- Firm expectations that the Federal Reserve (Fed) will follow a more gradual policy-easing approach this year are expected to limit the downside in the US Dollar. According to the CME FedWatch tool, traders are confident that the Fed will not cut interest rates in the coming policy meetings later this month and in March.
- On the contrary, solid European Central Bank (ECB) dovish bets would continue weighing on the Euro. Market participants expect the ECB to keep easing its Deposit Facility rate at a gradual pace of 25 basis points (bps) for the next four policy meetings. Also, a string of ECB officials are comfortable with dovish bets.
- On Monday, ECB policymaker and Croatian central bank chief Boris Vujčić said, "I don't feel uncomfortable with the current market pricing.". Vujčić added that risks to the inflation outlook are broadly balanced.
Technical Analysis: EUR/USD corrects lower from a two-week high of 1.0430
EUR/USD drops after revisiting a two-week high of 1.0430 in Tuesday’s European session. The major currency pair rebounds 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 has improved as EUR/USD climbs above the 20-day Exponential Moving Average (EMA), which trades around 1.0346. However, the longer-term outlook remains bearish as the 200-day EMA at 1.0702 points downwards.
Looking down, the January 13 low of 1.0177 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.