Trade war risks resurface

The US imposes tariffs on EU countries over Greenland.
Gold rises to record highs following last year's pattern.

Alexander Kuptsikevich FxPro

Just as confidence in the US dollar began to return, Donald Trump dealt it two significant blows. The greenback coped with the first lawsuit against Jerome Powell. However, the White House's introduction of 10% tariffs against several European countries, with the risk of them rising to 25% by the summer, forced the bears on EUR/USD to retreat.

History now repeats itself. In October 2024, ahead of the presidential election, Wall Street Journal experts expected the US economy to grow by 2.1% in 2025. However, due to tariffs, they were forced to lower their forecast to 1.8% in April. Their January estimate for 2026 is 2.2%. The trade war between the US and the EU risks significantly reducing it. The absorption of import duties by Americans is fraught with a resumption of the cooling process in the labour market. This will force the Fed to return to the topic of easing monetary policy. It’s becoming clear why investors are buying EUR/USD again.

The main reasons for the USD index rally at the start of the year were the Fed's prolonged pause in its rate cuts, the wide interest rate differential and the gradual return of confidence. Investors value reliable places to park their money, especially the US Treasury bond market. High political control over central banks in countries such as Turkey has triggered uncontrollable inflation. If this experience is repeated in the United States, it will change the role of Treasuries in the global debt market and undermine confidence in the greenback.

The escalation of risks of a new trade war between the US and the European Union allowed gold to renew its record high with a sense of déjà vu. Precious metals reacted to the massive tariffs on America's Liberation Day in April 2025 with a violent rally to new historic highs. Then, as TACO-trade, or ‘’Trump always chickens out’’ flourished, gold quotes entered a prolonged consolidation. It took Powell’s signals in Jackson Hole on more rate cuts soon in August for the precious metal to renew its growth.

Investors now have a good template to use against the backdrop of a potential slowdown in the US economy due to tariffs. However, this time the European Union may respond to the United States, which will result in a full-blown trade war.

Author

Alexander Kuptsikevich

FxPro

Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.

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