EUR/USD trades cautiously as investors monitor German coalition negotiations

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19:03 - 25/02/2025

EUR/USD hovers near 1.0450 as investors doubt the new German coalition's ability to boost economic growth.
CDU leader Friedrich Merz is unlikely to form an alliance with the Far-Right.
US President Trump reaffirms plans to impose 25% tariffs on Canada and Mexico.

EUR/USD remains steady above the key support level of 1.0450 during European trading hours on Tuesday as investors closely monitor coalition negotiations led by Friedrich Merz’s conservative bloc.

Merz, leader of the Christian Democratic Union (CDU) and the likely next German Chancellor, faces challenging talks to push forward his economic agenda, which includes easing the ‘debt brake’ rule to raise the budget deficit cap from its current 0.35% of GDP. The most probable coalition scenario involves the CDU forming a government with the Social Democratic Party (SPD) of outgoing Chancellor Olaf Scholz, while an alliance with Alice Weidel’s far-right Alternative for Germany (AfD) remains unlikely.

Investor sentiment remains cautious as concerns grow over Germany’s fragile economic outlook. Historically, coalition governments tend to slow down policy implementation, leading to skepticism about Merz’s ability to drive economic recovery. This uncertainty prompted Euro (EUR) traders to unwind long positions on Monday, reversing earlier gains. Germany’s economy has been in contraction for two consecutive years, with additional pressure from fears of potential tariffs imposed by U.S. President Donald Trump.

European Central Bank (ECB) policymaker and Bundesbank President Joachim Nagel recently highlighted Germany’s vulnerability to Trump’s trade policies, emphasizing the country’s strong reliance on exports.

On the economic front, Eurozone Q4 Negotiated Wage Rates declined to 4.12% from 5.43% in the previous quarter, signaling a potential easing in wage-driven inflation pressures. Meanwhile, investors await a speech from ECB Executive Board member Isabel Schnabel at the Bank of England’s Annual Research Conference in London at 13:00 GMT, which could provide further insights into the central bank’s monetary policy outlook.

Daily Digest Market Movers: EUR/USD Under Pressure as US Dollar Holds Steady

EUR/USD remains under pressure amid renewed concerns over a potential global trade war. On Monday, U.S. President Donald Trump reaffirmed his commitment to imposing 25% tariffs on imports from Canada and Mexico starting March 4, following a one-month delay after both countries agreed to tighten border controls. “The tariffs are going forward on time, on schedule,” Trump stated from the White House.
Fears of escalating trade tensions have provided some stability to the U.S. Dollar (USD). The U.S. Dollar Index (DXY), which measures the Greenback’s performance against six major currencies, dipped slightly on Tuesday but rebounded strongly on Monday, climbing to near 106.75 after touching an 11-week low of 106.10 earlier in the session.
Investors now turn their attention to key U.S. economic data releases later this week. January’s Durable Goods Orders and the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred inflation measure, will be released on Thursday and Friday, respectively. Market participants will closely analyze the PCE data, as some Fed officials have recently expressed concerns about a slowdown in disinflation.
Additionally, in Tuesday’s session, investors will watch for the U.S. Consumer Confidence data for February, set to be released at 15:00 GMT, which could offer further insight into the economic outlook and consumer sentiment.