EUR/USD breaks below 1.0400 due to renewed US-EU trade tensions
- EUR/USD faces selling pressure amid heightened risk aversion following renewed US-EU trade tensions.
- US President Trump hinted at imposing “reciprocal” tariffs on the European Union (EU) as early as April.
- The US GDP Annualized grew by 2.3% in Q4 2024, matching market expectations.
EUR/USD continues its decline for the third consecutive day, trading near 1.0390 during the Asian session on Friday. The pair weakens as the risk-sensitive Euro faces selling pressure amid heightened risk aversion following renewed US-EU trade tensions. US President Donald Trump hinted at imposing “reciprocal” tariffs on the European Union (EU) as early as April.
During a press conference on Wednesday, Trump announced that a 25% tariff on “cars and other things” from the Eurozone would be implemented “very soon.” In response, a European Commission (EC) spokesperson stated, “The EU will react firmly and immediately against unjustified barriers to free and fair trade.”
The prospect of a US-EU tariff war poses a significant threat to the already fragile Eurozone economy, which continues to struggle with weak demand. This uncertainty could further weigh on the Euro, adding to the downward pressure on the EUR/USD pair.
Meanwhile, the US Dollar Index (DXY), which measures the USD against a basket of six major currencies, strengthened following the release of US Gross Domestic Product (GDP) data on Thursday. At the time of writing, the DXY hovers near 107.50.
The US GDP Annualized expanded by 2.3% in the fourth quarter of 2024, aligning with both the initial estimate and market expectations. Additionally, new orders for durable goods surged by 3.1% in January, surpassing forecasts of 2% and rebounding from a 2.2% decline in December.
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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