- EUR/USD rebounds sharply to near 1.0350 as US President Trump postpones his ordersof tariffs on Canada and Mexico for 30 days.
- Trump’s intentions to impose tariffs on China remain intact.
- The ECB is expected to cut interest rates three times more this year.
EUR/USD bounces back from the intraday low of 1.0270 and rebounds to near 1.0350 in Tuesday’s European session. The major currency pair finds buyers’ demand as United States (US) President Donald Trump’s decision to postpone tariffs on Canada and Mexico has diminished the safe-haven appeal of the US Dollar (USD).
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, surrenders its intraday gains and trades at 108.44 at the time of writing, right on track to Monday’s low of 108.40.
US President Trump suspended tariff imposition on his North American partners after they agreed to cooperate to stop the flow of fentanyl. On the other hand, the president’s proposal of imposing 10% tariffs on China is still on the table, and moreover, he has even proposed to go further. “China hopefully is going to stop sending us fentanyl, and if they’re not, the tariffs are going to go substantially higher,” Trump said.
Meanwhile, China has delivered a swift response to Trump’s tariffs with higher levies of 15% on Coal and Liquified Natural Gas (LNG), and 10% for Crude Oil, farm equipment, and some autos.
Such a scenario indicates that the trade war will not go global and will remain majorly between the US and China, which has weighed on demand for safe-haven assets.
On the economic front, the US Dollar will be guided by a slew of labor market-related economic indicators this week, such as JOLTS Job Openings, ADP Employment Change and Nonfarm Payrolls (NFP) data, and the US ISM Services PMI figures.
The labor market data will influence market speculation for the Federal Reserve’s (Fed) monetary policy outlook for the entire year. Currently, the Fed is in a waiting mode in interest rates until it sees any “real progress in inflation or at least some weakness in the labor market”.
Daily digest market movers: EUR/USD recovers at US Dollar’s expense
- The recovery move in the EUR/USD pair has come from some weakness in the US Dollar, while the outlook for the Euro (EUR) continues to remain uncertain as investors expect the Eurozone would be the next to face lethal tariff threats by US President Trump. Over the weekend, Trump said that he will definitely impose tariffs on the Eurozone after accusing the old continent of not buying enough US cars and farm products. He added that the EU takes “almost nothing and we take everything from them”.
- In response to Trump’s tariff threats, French President Emmanuel Macron said that the European Union (EU) would retaliate if its interests were targeted. “If our commercial interests are attacked, Europe, as a true power, will have to make itself respected and therefore react,” Macron said, The Guardian reported.
- Market experts believe that trade and investment between the old continent and the US are one of the largest globally, and a trade war between them would accelerate inflation and lead to an economic disruption. Higher Eurozone inflation would also create troubles for the European Central Bank (ECB), which is on the policy expansion path amid confidence that price pressures will sustainably return to the central bank’s target of 2% this year.
- The ECB reduced its Deposit Facility rate by 25 basis points (bps) to 2.75% and guided that the monetary policy path is clear. Traders are confident that the ECB will deliver three more interest rate cuts by the summer.
Technical Analysis: EUR/USD rebounds from 1.0210
EUR/USD recovers from its three-week low of 1.0210 to trade near 1.0350 on Tuesday, but is still trading below the 20-day and 50-day Exponential Moving Averages (EMAs) around 1.0379 and 1.0439, respectively, suggesting a bearish trend.
The 14-day Relative Strength Index (RSI) holds above 40.00. A bearish momentum could trigger if the RSI breaks below that level.
Looking down, the January 13 low of 1.0177 and the round-level support of 1.0100 will act as major support zones 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.
