EURUSD stays on its toes as investors expect the European Union to be one of the leading US trading partners that will attract the highest tariffs. President Donald Trump has accused the EU several times for unfair trade practices with the US, blamed the Eurozone for not buying enough American goods.
Trump’s sweeping hefty tariffs on the Eurozone will significantly impact the region’s economic outlook.
Last week, ECB President Christine Lagarde said that the trade war could subtract 0.5% from the bloc’s economic growth. Lower growth and easing inflationary pressures in the Eurozone would boost expectations that the European Central Bank will cut interest rates in the policy meeting this month.
On Tuesday, Eurostat reported that the core Harmonized Index of Consumer Prices (HICP) – excluding volatile items such as food, energy, alcohol and tobacco – rose at a slower pace of 2.4% in 12 months to March, compared to estimates of 2.5% and the prior release of 2.6%.
In early European trading on Wednesday, Lagarde also sounded confident in her interview on the Irish radio station Newstalk that the battle against inflation will be over soon.
“There is still a bit of work to do on inflation, but it is very close to target,” she said.
The Eurozone outlook could be worsened if the EU Commission shoots retaliatory measures against Trump’s tariffs.
European Commission President Ursula von der Leyen warned on Tuesday, “we do not necessarily want to retaliate, but if it is necessary, we have a strong plan to do so, and we will use it.”
Von der Leyen added that all instruments for countermeasures are “on the table” and that we have the power to “push back against US tariffs”.
President Trump’s fresh suite of reciprocal tariffs is expected to become effective immediately after the announcement at 20.00 GMT.
Such a scenario will upend the global trading system, making products of countries that will attract higher tariffs less competitive. Higher import duties will also result in a slowdown in global business investment as firms would struggle to ascertain the demand outlook of their products.
Comments from US Treasury Secretary Scott Bessent on Tuesday also indicated that the President will impose the highest level of levies on trading partners and stated that targeted countries could pass them by meeting US demands, specifically by diminishing rates on imports from the US.
Investors expect Trump’s tariffs will also be unfavourable to the US economy, considering consumer and business confidence deterioration.
The ISM Manufacturing Purchasing Managers Index (PMI) also showed on Tuesday that the business activity contracted in March after expanding for two straight months.
EURUSD chart by TradingView
(Source: OANDA)
