- EUR/USD trades with caution around 1.0400 as the US Dollar strengthened after US President Trump confirmed tariffs on his North American partners and China on Thursday.
- Tariffs on Canada and Mexico, and an additional 10% levy on China to go into effect on March 4, reciprocal tariffs on April 2.
- Investors await preliminary German inflation data for February and the US PCE inflation for January.
EUR/USD trades cautiously after sliding to near the key support of 1.0400 in the European trading session on Friday. The major currency pair faces selling pressure as fresh tariff threats from United States (US) President Donald Trump have increased the appeal of safe-haven assets, such as the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its Thursday’s strong upward move to near 107.40.
On Thursday, President Trump communicated from his account on Truth Social that 25% tariffs on Canada and Mexico are “coming into effect on March 4“ as “drugs are still pouring” into the economy from the borders of his North American allies. Trump also threatened to impose an “additional 10% levy on China” on the same date as a large percentage of drugs entering the US is in the form of fentanyl, which is made in and supplied by China. Additionally, Donald Trump said he is poised to introduce reciprocal tariffs on April 2.
Market experts believe that Trump’s tariff agenda will be pro-growth and inflationary for the US economy. Such a scenario would compel Federal Reserve (Fed) officials to maintain a restrictive monetary policy stance.
On Thursday, Philadelphia Fed Bank President Patrick Harker supported maintaining interest rates in the current range of 4.25%-4.50%. Harker said that he believes the current level is optimal for bringing inflation back to the 2% target without harming the labor market and economic growth.
To know the current status of inflation, investors await the US Personal Consumption Expenditures Price Index (PCE) data for January, which will be published at 13:30 GMT. Economists expect the core PCE inflation, which is the Fed’s preferred inflation gauge, to have decelerated to 2.6% from 2.8% in December.
Daily digest market movers: EUR/USD is on backfoot ahead of German inflation
- EUR/USD stays under pressure ahead of the preliminary inflation data of Germany and its six states for February, which will be published during the European session. Investors await the inflation data as it will influence market expectations for the European Central Bank’s (ECB) monetary policy outlook.
- According to market expectations, inflationary pressures slowed in February. This scenario would strengthen speculation that the ECB will cut interest rates again in the next policy meeting on Thursday.
- According to a February 19-27 Reuters poll, the ECB is certain to cut its Deposit Facility rate by 25 basis points (bps) to 2.5%. This would be the fifth interest rate cut by the central bank in a row. Dovish votes on the poll were based on fears that President Donald Trump’s tariff agenda will damage the Eurozone economic growth.
- On Wednesday, President Trump threatened to impose tariffs on the Eurozone. Trump said the tariffs will be announced “very soon,” and it will be 25% on “cars and other things”. The German economy is expected to be the major victim of a trade war between the Eurozone and the US, being the fourth largest trading partner of the country.
- The Reuters poll also showed that respondents were confident that the ECB would cut interest rates twice more by the middle of the year.
- Meanwhile, German Retail Sales for January have come in higher than expected. The retail sales data, a key measure of consumer spending, rose by 0.2% in the month while it was expected to remain flat. In December, the consumer spending measure contracted by 1.6%. On a yearly basis, Retail Sales rose at a faster pace of 2.9% compared to the 1.8% growth seen in December.
Technical Analysis: EUR/USD breaks below 20-day EMA
EUR/USD faces strong selling pressure after breaking on Thursday the tight consolidation range of 1.0450-1.0530, in which it has been trading since February 21. The major currency pair extends its downside below the 20-day Exponential Moving Average (EMA), which stands around 1.0430, suggesting that the near-term trend has turned bearish.
The 14-day Relative Strength Index (RSI) declines toward 40.00. A bearish momentum would activate if the RSI falls below that level.
Looking down, the February 10 low of 1.0285 will act as the major support zone for the pair. Conversely, the February 24 high of 1.0530 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.
