EUR/USD trades higher as Trump policies weigh on US economic outlook
- EUR/USD rises to near 1.0850 as the US Dollar weakens amid accelerating concerns over the US economic outlook.
- US President Trump’s policies are expected to slow down the US economic growth.
- ECB’s Centeno expects that Eurozone inflation is almost out of the woods.
EUR/USD trades firmly around 1.0850 after recovering early losses in Monday’s European session. The major currency pair strengthens as the US Dollar (USD) struggles to gain ground after last week’s sharp drop. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades vulnerable near a fresh four-month low of 103.50.
The outlook of the US Dollar remains uncertain as investors have become increasingly concerned over how United States (US) President Donald Trump’s ‘America first’ policies will shape the economy. On Friday, the comments from the President in an interview with Fox News indicated that Trump’s policies should lead to short-term economic shocks.
"There is a period of transition because what we are doing is very big,” Trump told the "Sunday Morning Futures" program. This comment came after he was asked about the possibility of a recession.
Lately, a slew of US data has indicated signs of an economic slowdown, such as 15-month low Consumer Confidence, an unexpected decline in the ISM Manufacturing New Orders, and slightly lower-than-expected Nonfarm Payrolls (NFP) data for February. Weak data has forced traders to raise bets supporting the Federal Reserve (Fed) to resume the policy-easing cycle in the June meeting. The likelihood for the Fed to cut interest rates in June has increased to 82% from 54% a month ago, according to the CME FedWatch tool.
Meanwhile, Fed Chair Jerome Powell continued to guide a “wait and see” approach on interest rates due to the lack of clarity on Trump’s tariff and tax policies. “Uncertainty around Trump administration policies and their economic effects remains high,” Powell said in an economic forum at the University of Chicago Booth School on Friday, and the “net effect of trade, immigration, fiscal, and regulation policy is what matters for the economy and the monetary policy.”
Daily digest market movers: EUR/USD faces pressure as Euro corrects
- A slight downside move in the EUR/USD pair is also driven by weakness in the Euro (EUR) against its major peers at the start of the week. The Euro is down as profit-booking kicks in after a robust upside move last week. The Euro outperformed as German leaders, including likely new Chancellor Frederich Merz, agreed to stretch the borrowing limit or so-called “debt brake” and create a 500 billion Euro (EUR) infrastructure fund to boost defense spending and stimulate economic growth.
- Germany’s decision of large economic stimulus forced traders to pare bets supporting the European Central Bank (ECB) to cut interest rates two times more this year, assuming that the impact could be inflationary for the Eurozone. Last week, the ECB reduced its Deposit Facility rate by 25 basis points (bps) to 2.5% but didn’t commit a preset monetary expansion path.
- Meanwhile, comments from ECB policymaker and Governor of Bank of Portugal Mario Centeno in a conference on Friday indicated that more interest rate cuts are in the pipeline. Centeno said that the Eurozone is on its way to “normalizing monetary policy”. On the inflation outlook, Centeno said that inflation is "almost out of the woods" and has decelerated to "a level that is very much closer to our target".
- On the economic front, month-on-month German Industrial Production data grew at a faster-than-expected pace in January. The industrial production of the Eurozone’s locomotive rose by 2%, strongly than estimates of 1.5%. In December, it declined by 1.5%. Meanwhile, Eurozone Sentix Investor Confidence improves to -2.9 in March from -12.7 in February.
Technical Analysis: EUR/USD shows resilience near 1.0800
EUR/USD stabilizes around 1.0850 after correcting to near 1.0800 on Monday. The major currency pair strengthened after a decisive breakout above the December 6 high of 1.0630 last week. The long-term outlook of the major currency pair is bullish as it holds above the 200-day Exponential Moving Average (EMA), which trades around 1.0640.
The 14-day Relative Strength Index (RSI) jumps to near 70.00, indicating a strong bullish momentum.
Looking down, the December 6 high of 1.0630 will act as the major support zone for the pair. Conversely, the November 6 high of 1.0937 and the psychological level of 1.1000 will be key barriers 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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