EUR/USD softens below 1.0450 on Trump’s tariff threats
- EUR/USD edges lower to 1.0425 in Wednesday’s late American session.
- FOMC Minutes indicated that the Fed wants to take time before making adjustments to interest rates.
- The fresh round of Trump’s tariff threats weighs on the Euro.
The EUR/USD pair weakens to near 1.0425 during the late American session on Wednesday. Tariff concerns from US President Donald Trump and geopolitical tension provide some support to the US Dollar (USD). Investors await the US weekly Initial Jobless Claims, the CB Leading Economic Index and the Philly Fed Manufacturing Index reports, which are due later on Thursday.
The minutes from the FOMC meeting released on Wednesday stated that it was appropriate to keep the target interest rate unchanged at the January meeting, adding that the Fed believes that it is well positioned to take time to assess the outlook for economic activity, the labor market and inflation. Fed policymakers agreed that inflation must show clear signs of slowing down before any further rate reductions can be made.
The Federal Reserve’s (Fed) Austan Goolsbee, Michael Barr and Alberto Musalem are set to speak on Thursday. Their remarks could offer some hints about the path ahead for US interest rates. Any hawkish comments from Fed policymakers could boost the Greenback in the near term.
The latest round of tariff threats lifts the Greenback and creates a headwind for EUR/USD. Trump has criticized the EU’s car tariffs and threatened reciprocal tariffs on various sectors. Late Tuesday, Trump said that he intends to impose auto tariffs "in the neighborhood of 25%" and similar duties on semiconductors and pharmaceutical imports.
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.
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