The market is witnessing a rather intriguing situation following the imposition of tariffs on Canada, Mexico, and additional duties on China. Since the start of the session, currency markets have displayed a lack of significant volatility, but as time progresses, we are observing a continued weakening of the dollar and a rise in the European currency. The EURUSD pair is breaking above the 1.0500 level. Currently, the pair is testing recent local highs and could potentially rise to its highest levels since the first half of December 2024. Notably, the area around 1.0520 has remained a persistent resistance level for several months. For the euro, the narrative surrounding a potential ceasefire agreement in Ukraine has been supportive. Conversely, past announcements of tariffs, now implemented on Mexico, Canada, and further on China, have historically weighed negatively on the euro.
Concurrently, in Europe, there is significant discourse surrounding plans to increase spending. Ursula von der Leyen indicated that the EU intends to propose a EUR 150 billion loan program earmarked for defense expenditures. This announcement tempered the rise in European bond prices. Conversely, we have recently observed a substantial surge in US bond prices (a marked decline in yields).
EURUSD Tests Key Resistance
EURUSD is testing a crucial resistance level. A sustained break above this level would target the 1.0600 area, coinciding with the 38.2% Fibonacci retracement. Potentially, we are witnessing the formation of a large saucer pattern, which has been developing since mid-November 2024. Source: xStation5
US bond yields have fallen to their lowest levels since November, while the spread between German and US yields has widened to its highest level since September. This spread suggests a possible undervaluation of the EURUSD pair, although this appears to be primarily driven by a unilateral movement in US bonds. Source: Bloomberg Finance LP
DE40 Reverses Gains
Conversely, European indices are showing clear signs of weakness, reacting to the imposition of tariffs on the US’s closest partners. In essence, nearly all of yesterday’s gains in German stocks, which were driven by potential peace plans in Ukraine, have been reversed. Theoretically, volatility could increase in the coming hours as markets await Trump’s address to the Joint Session of Congress in the US. Some suggest the possibility of announcing a commodity agreement with Ukraine, potentially including security guarantees. On the other hand, US media have been reporting since yesterday about a halt in US aid to Ukraine, although this has not been explicitly confirmed by Donald Trump.
DE40 is significantly reversing the gains from yesterday’s session. Source: xStation5
It is worth noting that the DAX to S&P 500 price ratio has recently approached the 4 level. While this is not historically high over the past 10 years, we observed reversals from this level in 2020 and 2023, potentially indicating an overvaluation of the DAX relative to the S&P 500. Should a larger correction occur in the S&P 500, it could ultimately drag down European indices as well. At present, the correction on Wall Street, as measured by the broad index, does not exceed 5%. Source: Bloomberg Finance LP.
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