EUR/USD slumps on Trump tariff worries, US inflation in focus
- EUR/USD declines to near 1.0600 as investors expect that Trump’s protectionist policies will significantly weigh on the Eurozone export sector.
- The ECB is expected to cut interest rates by 50 bps in December.
- Investors shift their focus to the US inflation data for October.
EUR/USD posts a fresh nearly seven-month low below 1.0620 in Tuesday’s European session. The major currency pair continues to face intense selling pressure on heightened concerns over the Eurozone export sector outlook, given that President-elect Donald Trump vowed to raise import tariffs by 10% in his election campaign.
Market experts believe that Trump’s landslide victory is favorable for consumer confidence and business sentiment in the United States (US) but is worrisome for their leading trading partners. Trump's protectionist policies could also lead to a vicious cycle of global trade war, especially with the Eurozone, as Trump mentioned that the euro bloc will "pay a big price" for not buying enough American exports.
Implementing a 10% tariff on all imported goods advocated by Trump would have a negative impact of 0.1% on the European Union’s (EU) Gross Domestic Product (GDP), according to a recent London School of Economics and Political Science paper.
Meanwhile, the collapse of the German three-party coalition after Chancellor Olaf Scholz sacked Finance Minister Christian Linder last week has also been a major cause of weakness in the Euro (EUR). Olaf is willing to call for a no-confidence vote in December and a snap election in early 2025, according to Deutsche Welle news.
German political uncertainty and potential weakness in the volume of exports are expected to be borne by the European Central Bank (ECB). “It seems a leap of faith at this stage to expect a complete turnaround in the German fiscal position and instead, the onus will be on the European Central Bank to support the eurozone economy, which is expected to cut interest rates by 50 basis points (bps) in December,” analysts at ING said.
Daily digest market movers: EUR/USD weakens as US Dollar gains further
- EUR/USD is also down by US Dollar’s (USD) strength, which continues to enjoy so-called ‘Trump trades’. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends its rally above 105.70.
- The Greenback rises further on optimism over potential outcomes of Trump’s policies, such as higher labor demand, business investment, and persistent price pressures, which would force the Federal Reserve (Fed) to follow a more gradual policy-easing approach.
- Analysts at JP Morgan have raised its terminal rate forecast to 3.5% from 3%, predicting a steady pace of 25 bps cuts beginning in December. According to the CME FeDwatch tool, the probability of the Fed reducing interest rates by 25 bps to 4.25%-4.50% in December is 65%.
- For more cues about the interest rate path, investors will pay close attention to the US Consumer Price Index (CPI) data for October, which will be released on Wednesday, and commentaries from a string of Fed officials this week, including Fed Chair Jerome Powell.
- Economists expect the headline inflation to have accelerated to 2.6% from 2.4% in September, with core CPI – which excludes volatile food and energy prices – rising steadily by 3.3%.
Technical Analysis: EUR/USD slides to near 1.0600
EUR/USD extends its losing streak for the third trading day on Tuesday. The major currency pair declines further and approaches the year-to-date (YTD) low at around 1.0600. The shared currency pair is expected to face more downside, with the 20-day Exponential Moving Average (EMA) turning vertically south near 1.0800.
The return of the 14-day Relative Strength Index (RSI) in the range of 20.00-40.00 indicates bearish momentum gaining traction and adds to evidence of more downside.
Looking down, the pair could decline to near the psychological support of 1.0500 after breaking below 1.0600. On the flip side, the round-level resistance of 1.0700 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.
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