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Dollar rebounds as Trump assures tariff hike plan still on

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The EURUSD currency pair corrected lower to near 1.0350 in Tuesday’s European session after surging to 1.0430 on Monday. The Euro-dollar pair faces pressure as the greenback pares some of Monday’s losses.

The DXY Dollar Index bounced back around 108.50 from its almost two-week low slightly below 108.00.

The US dollar took a vertical dive on Monday as Donald Trump’s presidential memo lacked immediate tariff imposition on foreign countries. The memo was directing federal agencies to study trade policies and evaluate US trade relationships with China and America’s continental neighbours.

Donald Trump clarified that the proposal of universal tariff hikes is on the table, but “we are not ready for that yet”.

However, he highlighted the sizeable trade deficit issue with the Eurozone. Trump said that he would remedy the trade imbalance either by “raising tariffs or Europe buying more US oil and gas”, according to Reuters.

The absence of tariff hikes in Trump’s comments on his first day at the White House led to strong buying in risk-sensitive currencies. The Euro rallied almost 1.3% against the Dollar despite fears of higher tariffs remaining intact.

Firm expectations that the Federal Reserve will follow a more gradual policy-easing approach this year are expected to limit the downside in the US Dollar.

According to the CME FedWatch tool, traders are confident that the Fed will not cut interest rates in the coming policy meetings later this month and in March. On the contrary, solid European Central Bank dovish bets would continue weighing on the Euro.

Market participants expect the ECB to keep easing its Deposit Facility rate at a gradual pace of 25 basis points (bps) for the next four policy meetings. Also, a string of ECB officials are comfortable with dovish bets.

On Monday, ECB policymaker and Croatian central bank chief Boris Vujčić said, “I don’t feel uncomfortable with the current market pricing.” He added that risks to the inflation outlook are broadly balanced.

On the economic front, German ZEW Economic Sentiment Index declined at a faster pace to 10.3 in January from 15.7 in December. Economists expected the sentiment data to have eased to 15.3.

However, the Eurozone ZEW Economic Sentiment Index came in surprisingly higher at 18 from 17 in December, while it was expected to come in slightly lower at 16.9.

EURUSD chart by TradingView

(Source: OANDA)