Tariff pause will be a welcome relief for ECB members – Risks to Euro Area growth remain elevated

Matthew Ryan, CFA Ebury

The EUR/USD pair continued on its steep incline during London trading on Thursday, surging close to the 1.14 level and, at one stage, registering a daily gain of around 2.5%.

The European Union yesterday said that it would be pausing its admittedly modest tariff countermeasures against the US for 90-days as it instead seeks to sit down and negotiate.

Yet, it’s entirely dollar outflows that are fuelling the move in the pair, with still sky-high uncertainty and an apparent loss of confidence in US assets triggering investors to flee the greenback in search of safety elsewhere - in the current episode, this includes the euro.

In the midst of the tariff chaos, the European Central Bank will be unveiling their latest policy decision next Thursday. Another 25 basis point interest rate cut is fully baked in by market participants, and we agree that one is indeed on the way.

While the tariff pause will be a welcome relief for ECB members, risks to Euro Area growth remain elevated, and another cut at this stage appear warranted to insure against the downside.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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