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To impose or not to impose—that is the question. Will Donald Trump implement tariffs, or will he abandon them? The fate of the EUR/USD exchange rate depends on this decision. Europe has become a new target for threats from the Republican president, leading to a continued decline of the euro. Although the implementation of import tariffs on Mexico and Canada has been postponed from February to March, granting some reprieve to the U.S. neighbors, it remains uncertain if the White House will take a similar lenient approach with other countries and regions.
Despite the prevailing bearish sentiment surrounding EUR/USD, the effects of Donald Trump's protectionist policies are already reflected in the pair's exchange rate. This suggests that if tariffs against the EU are not introduced, the euro may have a chance to rebound. Unsurprisingly, investors are feeling anxious, and the volatility of the euro is steadily increasing, mirroring the volatility seen in the Australian dollar.
The Australian dollar often serves as an indicator for the Chinese yuan, experiencing declines due to Trump's 10% tariffs on China. Similarly, the eurozone faces challenges; its export-driven economy tends to suffer more when a major buyer like China has difficulties. Currently, China is facing increasing issues. While its retaliatory tariffs on U.S. oil and agricultural equipment may not have a significant impact, they send a clear message: Beijing is not willing to back down easily.
On a positive note for the euro, French Prime Minister Francois Bayrou successfully pushed the budget through parliament. A vote of no confidence in the government is likely to be rejected since the socialists have indicated that they will not support it. Consequently, the yield spread between French and German bonds has decreased to 70 basis points.
Citigroup believes that this indicator will soon rise due to political, economic, fiscal, and credit rating risks, which could put additional pressure on the EUR/USD currency pair.
As the saying goes, trouble often comes in multiples. If the eurozone's fragile economy, the European Central Bank's commitment to aggressive monetary easing, and threats of tariffs are further complicated by political turmoil in France and Germany, the EUR/USD pair could face serious challenges. However, for the moment, the main currency pair is holding steady, especially since the White House has postponed tariffs against Mexico and Canada.
In my opinion, if a similar situation occurs with China, the bulls will find a new opportunity to take action. That said, Donald Trump has demonstrated that he is a decisive leader who is unlikely to issue empty threats. Tariffs will be implemented—possibly just a little later than expected.
From a technical standpoint, the daily EUR/USD chart shows that the bulls are trying to form an internal pin bar. A breakout above the upper boundary at 1.035 could signal a short-term buying opportunity. Conversely, if the euro drops below $1.030, it would indicate a signal to sell.
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