EUR/USD surged to a new high for the year, surpassing the 1.0700 mark, as the U.S. dollar weakened amid growing apprehension about the U.S. economic outlook. President Trump remained firm, stating that reciprocal tariffs would commence on April 2. Meanwhile, the ECB is poised to reduce interest rates by 25 basis points on Thursday.
Amid Wednesday’s trading session in North America, the EUR/USD pair climbed close to 1.0720, reaching its highest point this year. This uptick came as investors shed the U.S. dollar, driven by unease over the nation’s economic prospects. The U.S. Dollar Index, which tracks the dollar against a basket of six major currencies, dipped to a three-month low at 105.15.
Investor sentiment towards President Trump’s tariff strategy has shifted significantly. There are growing expectations that these tariffs may dampen U.S. economic growth, contrary to previous beliefs that they would bolster inflation and economic expansion.
Further adding to this sentiment, the U.S. ADP Employment Change data for February, released during Wednesday’s trading hours, highlighted the impact of Trump’s tariffs on business operations. The report indicated that private sector employment grew by only 77,000, missing the expected 140,000 and falling from the previous 186,000.
A report from Citi emphasized that the interconnected supply chains across the U.S., Mexico, and Canada, particularly in the auto industry, would likely face considerable challenges if the tariffs persisted beyond a couple of weeks. The bank projected a 0.1% contraction in Q1’s real GDP and suggested that the Federal Reserve could restart its policy-easing cycle in May, which had been on pause since December.
With tariffs now in place, declining inflation, falling equity markets, and slowing consumer spending, Citi anticipated an increased likelihood of a Fed rate cut come May.
On Tuesday, 25% tariffs on goods from Canada and Mexico and an additional 10% on Chinese imports took effect. Moreover, Trump reiterated to Congress that reciprocal tariffs would be enforced from April 2.
EUR/USD extended its rally on a strong showing the day before, buoyed by the Euro’s strength following an agreement between Germany’s likely next chancellor, Frederich Merz, and the Social Democratic Party. They agreed to establish a 500 billion Euro infrastructure fund and loosen borrowing constraints to boost defense spending and foster economic growth in the Eurozone, reforms that could trigger higher inflation in the region.
Investors are also keeping a close watch on the ECB’s upcoming monetary policy announcement on Thursday. The ECB is expected to cut its Deposit Facility Rate by 25 basis points for the fifth consecutive time, prompting keen attention to President Christine Lagarde’s post-meeting press conference. She is anticipated to provide clarity on monetary policy without detailing specific expansion plans. Market participants are also eager to understand the impact of Trump’s tariffs and Germany’s debt strategy on Eurozone inflation forecasts.
Despite this, concerns linger that President Trump’s tariff policies could dampen enthusiasm among Euro bulls. Germany, a significant exporter of automobiles to the U.S., could be affected by Trump’s proposal to raise tariffs on foreign cars from Germany from 2.5% to 25%.
Technically speaking, EUR/USD rallied past the 1.0700 threshold, breaking above the 200-day EMA for the first time since early November. The currency pair gained momentum following Tuesday’s breakout above the January 27 peak of 1.0533. The 14-day RSI surged beyond 60.00, and if it maintains this level, further bullish momentum could ensue. On the downside, the January 27 high of 1.0533 serves as a key support area, while the November 6 high of 1.0937 stands as the next significant resistance for Euro bulls.
FAQs on the German Economy:
Germany holds significant sway over the Euro, being the largest economy in the Eurozone. Its economic performance can heavily influence confidence in the Euro, with a stronger German economy bolstering the Euro’s value and vice versa. In previous crises, such as the 2009-12 Eurozone debt crisis, Germany played a vital role in stabilizing the economy and pushing for stricter fiscal rules. The German economic model is often viewed as a blueprint for stability and growth within the region.
Bunds, the bonds issued by the German government, play a significant role in the financial markets as a benchmark for other European government bonds. They are considered a safe investment due to strong backing by the German government, serving as a haven during economic uncertainty. Bund Yields, the returns on these bonds, fluctuate with bond prices and offer insights into investor sentiment.
The Bundesbank, Germany’s central bank, is pivotal in maintaining price stability and overseeing financial institutions within the country. It has a reputation for conservatism, prioritizing inflation control, which has significantly influenced the European Central Bank’s policies.
