EUR/USD gains as Trump’s tariff threats reignite trade war concerns

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The Euro (EUR) gains ground against the US Dollar (USD) on Monday, as renewed trade war threats from US President Donald Trump weigh broadly on the Greenback. At the time of writing, EUR/USD trades around 1.1648, up nearly 0.40% on the day and snapping a four-day losing streak.

EUR/USD rebounds as Trump’s tariff threats undermine the US Dollar.
European officials warn of countermeasures as risk sentiment deteriorates.
Stable Eurozone inflation keeps the ECB in wait-and-see mode.

Over the weekend, President Donald Trump posted on Truth Social that a 10% tariff would be imposed from February 1 on eight European nations, including Denmark, Germany, France, the UK, Sweden, Norway, the Netherlands and Finland. He added that the tariff would rise to 25% in June unless and until "a deal is reached for the complete and total purchase of Greenland".

The move has reignited fears of a broader transatlantic trade conflict, with the threat of retaliatory measures rattling investor confidence and triggering a fresh risk-off wave across global markets.

German Finance Minister Lars Klingbeil said countermeasures are available and must be prepared, while EU Economy Commissioner Valdis Dombrovskis warned that US tariff threats are “not acceptable,” adding that the European Union has tools at its disposal and that “nothing is off the table.” French President Emmanuel Macron has also urged the bloc to activate the EU’s “anti-coercion instrument.”

The Euro is also drawing support from steady inflation data out of the Eurozone. Figures released earlier in the day showed that the Core Harmonized Index of Consumer Prices (HICP) rose 0.3% MoM in December, while the annual core rate held at 2.3%.

Headline HICP increased 0.2% on the month, with yearly inflation easing slightly to 1.9%, just under the European Central Bank’s (ECB) 2% target.

The data reinforce expectations that the ECB is likely to maintain a cautious, wait-and-see stance and keep interest rates on hold for an extended period.

Beyond trade rhetoric, the Greenback is also losing some momentum as political and institutional uncertainties build. Markets are increasingly cautious ahead of an expected US Supreme Court ruling on the legality of President Trump’s use of emergency tariff powers, while attention is also turning to a potential shift in Federal Reserve (Fed) leadership, with Trump expected to announce his decision later this week.

Looking ahead, traders are positioning cautiously ahead of a heavy US economic calendar later this week. The focus will be on the delayed Personal Consumption Expenditures (PCE) inflation reports for October and November, alongside third-quarter GDP figures, preliminary S&P Global PMI surveys and the University of Michigan consumer sentiment data.

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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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