- Inflation takes centre stage as updates come from Europe and the United States.
- US President Donald Trump’s executive orders continue to overshadow macro developments.
- EUR/USD bullish potential receded in the last few days, with 1.0400 critical support.
The EUR/USD pair fell throughout the first half of the week, recovering in the second half to close it little changed at around 1.0480. The US Dollar (USD) benefited from the risk-averse environment, the latter resulting from the United States (US) President Donald Trump’s tariffs plan.
US President Donald Trump disrupts the mood
Trump’s executive orders and presidential actions took their tool on the market’s sentiment and fueled global uncertainty, despite actually refraining from announcing more levies.
His focus this week was on Russia. Trump spoke with his Russian counterpart, Vladimir Putin, initially reported as an attempt to end the war between Russia and Ukraine. A meeting was held in Saudi Arabia between representatives from both countries, which later clarified it was a first step to restore the relationship between the two nations.
The fact that Ukrainian authorities were left out of the reunion put President Volodymyr Zelenskyy on the defensive and he claimed no deal could be reached without European representation.
President Trump blamed Ukraine for the war and Zelenskyy responded the US President is living in a “disinformation bubble,” to which Trump responded by calling Zelenskyy a “dictator without elections.”
Trump also signed executive orders reducing health coverage, ending federal benefits for immigrants, and reducing the size of government funding to different departments while trimming Federal jobs.
Why does it matter?
Trump’s action matters because his decisions affect not only economic developments in the US and abroad but also because they affect central banks’ decisions worldwide, particularly the US Federal Reserve (Fed) ones. Just on Wednesday, the Federal Open Market Committee (FOMC) released the Minutes of the January meeting, in which policymakers unanimously decided to keep the benchmark interest rate unchanged at 4.25%-4.50%. Officials observed that the high degree of uncertainty made it appropriate for them to take a careful approach in considering additional adjustments to the monetary policy stance. Even further, policymakers pointed to upside risks to the inflation outlook amid higher costs resulting from Trump’s massive levies.
European concerns about growth
The European Central Bank (ECB) is also concerned about Trump’s actions and recently expressed concerns related to tariffs weighing on European growth. “Greater friction in global trade could weigh on euro area growth by dampening exports and weakening the global economy,” the ECB noted.
This came after the European Parliament released a document on February 13 analyzing the potential consequences on EU developments, considering the US is the EU’s largest partner for the export of goods and the second largest for the imports of goods.
“If the US imposes tariffs on products by EU companies, they would become more expensive and be sold less as a result. If the EU reacts by imposing tariffs on US products, then these would become more expensive for EU consumers.”
“The US imposing tariffs on other parts of the world could also create problems for the EU. Affected countries could decide to redirect their products that would become too expensive to sell in the US to Europe, making it more difficult for EU companies to compete,” the document stated.
Inflation data under scrutiny
Data-wise, the macroeconomic calendar had little relevant to offer beyond the mentioned FOMC Meeting Minutes. On Friday, the Hamburg Commercial Bank (HBOC) released the preliminary estimates of the EU February Purchasing Managers’ Indexes, which showed economies struggled to expand. According to the official report, “new orders continued to fall, however, and companies again lowered their staffing levels amid muted demand. Confidence also dipped and was at a three-month low.” Manufacturing output improved from 46.6 to 47.3, a nine-month high, but remained within contraction territory. The Services PMI, however, slid from 51.3 final in January to 50.7, its lowest in three months.
US S&P Global PMIs for the same period were mixed. On the one hand, manufacturing activity expanded at a faster-than-anticipated pace, up to 51.6 from the previous 51.2 and beating the expected 51.5. The Services PMI, on the other hand, contracted to 49.7 from the previous 52.9, resulting much worse than the 53 anticipated by market players.
The macroeconomic calendar will be a bit more interesting in the upcoming days, with inflation updates coming from both shores of the Atlantic. The EU will publish the final estimate of the January Harmonized Index of Consumer Prices (HICP) on Monday, while Germany will unveil the preliminary estimates of the February HICP on Friday. The US will also release the January Personal Consumption Expenditures (PCE) Price Index, the Fed’s favorite inflation gauge, at the end of the week.
In the middle, the calendar will also include a revision of the German Q4 Gross Domestic Product (GDP), and the second estimate of US GDP for the same period, the latter expected to be confirmed at 2.3%. US Durable Goods Orders and German Retail Sales will also see the light in the next few days.
EUR/USD technical outlook
From a technical point of view, EUR/USD bullish potential seems limited in the long run. The weekly chart shows that the pair traded at the upper end of the previous week’s range yet below a firmly bearish 20 Simple Moving Average (SMA), which provides dynamic resistance at around 1.0530. The 100 and 200 SMAs, in the meantime, remain far above the shorter one with modest downward slopes. At the same time, technical indicators hold below their midlines. The Momentum indicator maintains its upward slope, yet the Relative Strength Index (RSI) indicator has already resumed its slide, heading south at around 45.
The EUR/USD pair daily chart shows a marginally bullish 20 SMA provided support throughout the week and currently stands at around 1.0410. At the same time, a firmly bearish 100 SMA caps advances in the 1.0550 price zone. Finally, technical indicators hold within positive levels, but turned modestly lower, suggesting buyers are losing interest.
A break below the 1.0400 threshold could result in a decline towards the 1.0320 region, with the next support level at 1.0276, a relevant weekly low. Resistance, on the other hand, comes at 1.0527, January’s monthly high, followed by the mentioned 100-day SMA at 1.0550. A clear advance below the latter exposes 1.0639, the December monthly high.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.