Published: February 12th, 2025
The Euro slipped against the Dollar at the beginning of this week's trading session as forex traders responded to US President Donald Trump's weekend announcement that new tariffs on US imports would be imposed in February.
The White House said that a 25 per cent import duty was being levied against all steel and aluminium imports to the US, and that other tariffs would be announced in the coming days.
A note to investors from Bank of America (BoA) noted that ‘USD had gained across the board’ in the immediate aftermath of the announcement, while treasury yields rose on inflation worries and investors priced-in lowering odds for a second Fed rate cut in 2025.
Trump told reporters on Monday that new tariffs would be announced this week that equal those already levied by other countries against American goods, suggesting tariffs on EU products are now in the offing.
France's French foreign minister, Jean-Noel Barrot, told Reuters that the EU ‘must act to defend its interests,’ saying that the bloc will need to impose retaliatory measures if Trump makes good on his threat.
‘Trump tried this in 2018 and we responded in kind. We will do so again,’ he said. ‘The Commission is prepared to pull the trigger in response to any trade provocation.’
The potential for tit-for-tat tariffs suggests that Euro-Dollar weakness could be on the table in the short term.
Against that backdrop, US inflation readings could be definitive. Notable rises could give be supportive for Greenback some legs, BoA wrote, and push EUR/USD below 1.03. Alternatively, indications that inflation is subsiding could weigh on the Dollar as it would give hope for more than one Fed cut this year.
In October 2024, an analyst note from investment bank Jefferies suggested a dip in the Euro to Dollar rate’s 200-day moving average marked a significant deterioration in the pair’s technical outlook.
The firm's forecast model relies on the 200-day displaced moving average (DMA), placing the pair in a multi-week downtrend when below, and an uptrend when above.
‘The 200 day moving averages can be key long-term milestones where fiat currencies sometimes get caught and stay above or below their moving averages for extended periods.’
At that point the 200 DMA was located at 1.0872, with signals suggesting the technical level was acting as a ceiling, even as rebounds seen the previous week attempted to rise above it.
The immediate outlook was for EUR/USD to wallow below the 200 DMA and likely to retest the seven-day average of 1.0810.
The single currency was under pressure as more and more traders concluded that the European Central Bank (ECB) would cut interest rates more deeply, and at a more aggressive pace, than the US Fed.
That sentiment had already impacted Eurozone bond yields negatively versus the US. The week prior, Frankfurt responded to the Eurozone's softening inflation readings by reducing interest rates by another 25 basis points.
Multiple ECB speakers, including bank President Christine Lagarde, took to the financial event circuit and began dropping hints about what the policy future holds for EUR. Upside risks had ECB members attempting to lower expectations for the rate of future cuts, especially given the bank’s recent aggressive footing.
EUR reached a peak of 1.1174 USD in late August 2024 and was up 2.61 per cent against the USD for the month. While momentum had shown signs of slipping, FX strategists at Convera said the EUR/USD rate could still test the 30-month range close to USD 1.12 before the month concluded.
EUR had been riding high since release of the Federal Reserve's July-end policy meeting minutes on Wednesday, 21st August. The minutes revealed that a number of Fed policymakers were ready to cut rates then and there, raising expectations for a September reduction and additional cuts in the following months
In a note to investors, Convera wrote that aggressive bets on Fed easing '(had) been overshadowed by economic weakness in the Eurozone. EUR’s August rally has been steady and consistent, pushing it to a one-year high against USD.’
Over the previous three weeks, expectations for subsequent Fed rate cuts grew faster than the schedule expected from Frankfurt central bankers, leading to a divergence in rate expectations that was expected to pull the Dollar down against the Euro.
Convera said that traders betting on EUR/USD Euro-Dollar would need to ask themselves how long the situation could continue. The risk for EUR bulls was that the trade might have already run its course, raising the prospect of a sharp pullback.
'We maintain a bearish outlook over the coming three months for EUR/USD due to ongoing political risks in both the US and Eurozone. However, EUR's recent ascent could sustain itself in the run up up to the next Fed rate cut expected in September.’
At the end of January 2024, EUR was lower against the GBP, USD, and other majors as bets began to rise that the European Central Bank (ECB) was preparing to cut rates in April or May
Two of the bank’s rate-setting Governing Council members, Peter Kazimir and Mário Centeno, told Bloomberg that an April 2024 cut could be on the horizon.
‘The bank’s next action will be to implement a cut, and it is coming sooner than later,’ said Kazimir. ‘While the exact timing is still to be determined, potentially in April or May, this is less important than the impact of the decision.’
‘There is enough evidence currently at our disposal that we don't need to wait for the next wage data release. Already we can see the trajectory inflation is likely to take,’ said Centeno. He added that his preference is for an April rate cut.
The comments gave forex traders more reason to re-price expectations around an earlier ECB rate cut, a process that began after Frankfurt's January policy meeting, and the guidance coming out of it.
The Euro to Pound exchange rate dipped by nearly a third of one per cent to reach 0.8515. Analysts at Reuters wrote that ‘EUR/GBP fell to 0.8515 following dovish guidance on EUR from ECB policymakers. Centeno added that rate cuts ‘should come sooner not later.’
