- EUR/USD remains under pressure as the US Dollar appreciates amid likelihood of Trump increasing import tariffs and reducing corporate taxes.
- Trump’s fiscal policies could heighten inflation risks, potentially prompting the Fed to adopt a more restrictive monetary policy stance.
- German Chancellor Olaf Scholz dissolved the ruling coalition, leading to new elections to restore stability amid political uncertainty.
The EUR/USD pair continues to face downward pressure for a second consecutive session, hovering around 1.0720 during Monday’s Asian trading hours. The pair is weighed down by a stronger US Dollar (USD) and political uncertainties in Germany.
Investors are anticipating a less dovish stance from the Federal Reserve, as Donald Trump is likely to pursue his campaign promises to enact substantial tariffs, including a 10% increase on imports and a reduction in corporate taxes.
Analysts suggest that if Trump’s fiscal policies are implemented, they could lead to higher investment, spending, and labor demand, elevating inflation risks. This could prompt the Fed to adopt a more restrictive monetary policy, potentially strengthening the US Dollar and putting additional pressure on the EUR/USD pair.
However, Fed Chair Jerome Powell stated on Thursday that he doesn’t anticipate Trump’s potential return to the White House impacting the Fed’s near-term policy decisions. “We don’t guess, speculate, and we don’t assume what future government policy choices will be,” Powell noted after the bank decided to lower interest rates by 25 basis points to a range of 4.50%-4.75%, as expected.
On Friday, the preliminary University of Michigan Consumer Sentiment Index rose to 73.0 in November, up from 70.5 in October and exceeding the market’s expectation of 71.0. This upbeat data has broadly strengthened the Greenback.
In Germany, Chancellor Olaf Scholz appointed a new finance minister after dismissing the previous one, effectively dissolving the ruling coalition. This move has prompted calls from opposition and business leaders for new elections to bring stability amid the political uncertainty.
Analysts at Deutsche Bank noted that higher tariffs from the US could strain the Eurozone’s export sector, potentially impacting economic growth. “Uncertainty is high on many levels, from the exact impact of US tariffs to the timing of their implementation to how and when Europe responds,” they stated.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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