EUR/USD Rebounds Amid Investor Caution Over Trump's Tariff Threats

EUR/USD recovered to 1.0300 during Monday’s North American session after a weak opening near 1.0280. Despite the rebound, the pair remains 0.17% lower at press time. The initial decline was driven by renewed risk aversion as investors sought safe-haven assets amid heightened concerns over U.S. tariff threats from President Donald Trump.

The U.S. Dollar Index (DXY), which measures the dollar’s strength against six major currencies, gave up some intraday gains but remained 0.2% higher near 108.30. The greenback is expected to remain firm due to growing fears of a potential global trade war.

Key Developments Impacting EUR/USD

• Trump’s Tariff Plans: Over the weekend, President Trump threatened to impose a 25% tariff on steel and aluminum imports, as well as reciprocal tariffs on countries engaged in what he considers unfair trade practices.
• Global Trade Impact: The biggest casualty of these tariffs is expected to be Canada, the largest aluminum exporter to the U.S., along with Mexico, Brazil, Vietnam, and South Korea.
• Eurozone Risks: The Eurozone faces additional risks from potential reciprocal tariffs, particularly in the automobile sector, where the EU charges a 10% tariff on U.S. car imports, while the U.S. imposes only a 2.5% tariff on European vehicles.

Economic and Monetary Policy Outlook

• European Central Bank (ECB) Rate Expectations:
  • The ECB is expected to continue cutting interest rates to support the economy.
  • Policymakers have suggested rates may need to fall below the neutral rate due to weak economic conditions.
  • ECB economists estimate the neutral rate to be between 1.75% and 2.25%.
• Investor Confidence:
  • The Eurozone Sentix Investor Confidence Index improved to -12.7 from -17.7 in February, indicating better market sentiment.

Market Movers and Federal Reserve Outlook

• U.S. Dollar Strength and Fed Policy:
  • EUR/USD rebounded as the U.S. Dollar surrendered some intraday gains. However, the greenback remains firm due to expectations that the Federal Reserve (Fed) will keep interest rates in the 4.25%-4.50% range for 2025.
  • Macquarie strategists stated, “Our updated view is for no change in the Fed funds rate during 2025.” Previously, they expected a single 25bps rate cut in March or May.
• U.S. Labor Market Data:
  • Non-Farm Payrolls (NFP) Report (January):
    • 143K jobs added (compared to 307K in December, which was revised up from 256K).
    • Analysts note an upward revision trend, suggesting stronger labor market momentum.
  • Unemployment Rate: Fell to 4% from the previous and expected 4.1%.
  • Wage Growth: Average Hourly Earnings rose 4.1% YoY and 0.5% MoM, exceeding expectations.
• Upcoming Catalysts:
  • U.S. CPI Data (January) – To be released on Wednesday, expected to drive USD volatility.
  • Fed Chair Jerome Powell’s Testimony – Scheduled for Tuesday and Wednesday, closely watched for insights on future policy direction.

Technical Analysis: EUR/USD Outlook

• Current Price Action: EUR/USD recovered to 1.0300 in North American trading but faces resistance at the 50-day Exponential Moving Average (EMA) near 1.0436.
• RSI Indicator: The 14-day Relative Strength Index (RSI) oscillates between 40.00 and 60.00, indicating a sideways trend.
• Support Levels:
  • 1.0177 – January 13 low.
  • 1.0100 – Key psychological support level.
• Resistance Levels:
  • 1.0500 – Psychological resistance and key barrier for further upside movement.

EUR/USD continues to face a highly uncertain outlook, influenced by U.S. tariff risks, Federal Reserve policy, and Eurozone economic conditions. While a short-term recovery has been seen, further movements will depend on U.S. inflation data, Powell’s testimony, and ongoing trade tensions.