- EUR/USD posts a fresh year-to-date high above 1.0700 as the US Dollar weakens amid uncertainty over US growth prospects.
- US President Trump reiterates that reciprocal tariffs to take effect on April 2.
- The ECB is expected to reduce interest rates by 25 bps on Thursday.
EUR/USD rallies above 1.0700 in Wednesday’s European session, the highest level seen this year. The major currency pair gains as the Euro (EUR) strengthens across the board after Germany’s likely next chancellor, Frederich Merz, and the Social Democratic Party (SDP) agreed to create a 500 billion Euro (EUR) infrastructure fund and widen the borrowing limit on Tuesday to boost defense spending and uplift economic growth in the Eurozone. Such reforms could escalate inflation in the Eurozone economy.
Meanwhile, investors await the European Central Bank’s (ECB) monetary policy decision, which will be announced on Thursday. The ECB is almost certain to cut its Deposit Facility Rate by 25 basis points (bps) for the fifth time in a row. Therefore, investors will pay close attention to ECB President Christine Lagarde’s press conference after the policy meeting.
Lagarde is expected to ensure that the monetary policy path is clear but won’t provide a specific monetary expansion plan. Investors would like to know the impact of Trump tariffs and Germany’s debt restructuring on the Eurozone inflation outlook.
Still, investors remain worried that United States (US) President Donald Trump’s tariff agenda could spoil the party for Euro bulls. The Eurozone’s locomotive, Germany, is one of the major auto exporters to the US. Trump has already announced that he will charge 25% tariffs on foreign cars, which is currently 2.5% on automobiles from Germany.
Daily digest market movers: EUR/USD strengthens on concerns over US economic outlook
- EUR/USD extends the prior day’s strong upside move as investors continue to dump the US Dollar (USD) amid growing concerns about the US economic outlook. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides to an over three-month low of 105.15.
- A slew of events has changed the perception of market participants towards United States (US) President Donald Trump’s tariff agenda. Investors are anticipating that Trump tariffs will slow down US economic growth rather than being pro-growth and inflationary for the economy, which they had projected earlier.
- “Given the tight linkages in supply chains across the United States, Mexico, and Canada (USMCA) countries – most notably in the auto industry – tariffs left on for more than a matter of a week or two are likely to have a substantial impact on growth,” Citi said in a report.
- The bank also expects a 0.1% decline in the Q1 real Gross Domestic Product (GDP) and expects the Federal Reserve (Fed) to resume its policy-easing cycle, which it paused in December, in the May meeting.
- With tariffs now in effect, inflation cooling, equity markets declining, and consumer spending slowing, Citi expects the likelihood of a Fed rate cut in May has swelled.
- Meanwhile, 25% tariffs on Canada and Mexico and an additional 10% on China took effect on Tuesday. Moreover, President Trump confirmed that reciprocal tariffs will be imposed from April 2 while addressing Congress on Tuesday.
- In Wednesday’s session, investors will focus on the US ADP Employment Change and the ISM Services data for February, which will be published during the North American session. The economic data will influence market expectations for the Fed’s monetary policy outlook.
Technical Analysis: EUR/USD stabilizes above 1.0600
EUR/USD posts a fresh over three-month high near 1.0700, recovering above the 200-day Exponential Moving Average (EMA) for the first time since early November. The major currency pair strengthened on Tuesday after a decisive breakout above the January 27 high of 1.0533.
The 14-day Relative Strength Index (RSI) jumps above 60.00. A bullish momentum would trigger if the RSI stays above that level.
Looking down, the January 27 high of 1.0533 will act as the major support zone for the pair. Conversely, the November 6 high of 1.0937 will be the key barrier for the Euro bulls.
