EUR/USD remains above 1.0350, downside seems possible due to reciprocal tariff threats
- EUR/USD could depreciate as Trump’s administration is advancing a plan for reciprocal tariffs.
- The Eurozone faces the risk of reciprocal tariffs since it imposes a 10% duty on US automobile imports.
- The US Dollar may appreciate as Fed’s Powell signaled there is no urgency to cut interest rates.
EUR/USD remains steady around 1.0360 during Asian trading hours on Wednesday after gaining in the previous session. The pair could depreciate as US President Donald Trump’s administration is advancing a plan for reciprocal tariffs through executive action, bypassing Congress. The initiative aims to match or exceed tariffs imposed on US exports by other nations and could also address non-tariff barriers such as foreign subsidies, taxes, and regulations. According to the Wall Street Journal, this move could lead to higher US tariffs on goods from Japan, the EU, and China.
The Euro could face potential headwinds as the Eurozone is particularly vulnerable to reciprocal tariffs. Currently, it imposes a 10% tariff on US automobile imports while paying just 2.5% on its exports to the United States (US).
The EUR/USD pair could also face challenges amid a risk-off sentiment triggered by US President Donald Trump’s 25% tariff hike and Federal Reserve (Fed) Chair Jerome Powell’s cautious stance on monetary policy.
In his semi-annual report to Congress, Powell stated that Fed officials are in no rush to cut interest rates, citing a strong job market and solid economic growth. He also noted that Trump’s tariff policies could drive prices higher, complicating the Fed’s ability to lower rates.
Investors are now focused on the release of the US Consumer Price Index (CPI) inflation data later on Wednesday, which could influence expectations for the Fed’s policy stance. Headline CPI inflation is expected to hold steady at 2.9% year-over-year, while core CPI inflation is projected to ease slightly to 3.1% from 3.2%.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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