EUR/USD outlook: Weren’t tariffs supposed to be bad news for euro?

Well, yes, they were, and could prove to be in the long-term outlook. It is just that right now, investors are solely focusing on the US dollar – and boy have we seen some big moves since last night’s reciprocal tariffs announcement. The simultaneous decline in both stocks and the US dollar speaks volumes about investor confidence in Trump’s trade policy. The concern is that tariffs will drive inflation higher while dragging on economic growth—leaving the Federal Reserve with little room to manoeuvre, given that interest rates are already elevated. After initially dropping in the immediate aftermath of the announcement yesterday, the EUR/USD bounced back from near 1.08 handle and has since not looked back. Not yet anyway. Not that the tariffs news was necessarily positive for the euro. But it is all about the dollar and concerns about the stagflation in the US. Indeed, the greenback has slumped across the board, with the yen and pound also flying against it. Even risk-sensitive commodity dollars have rallied in favour of the US dollar, which rarely happens when it is risk-off. The primary concern at the moment is the immediate uncertainty surrounding these tariffs—and the inevitable retaliatory measures—and how they will impact inflation, economic growth, and corporate profitability. This uncertainty is currently driving the forex majors higher. In the near-term, we will continue to maintain a positive EUR/USD outlook, but our main upside objective of 1.1000 has already been surpassed. Thus, some giveback will not come as a surprise to us from near 1.1150 resistance. But dip-buyers will be lurking.

 

But I thought tariffs were bad news for euro?

 

A 20% reciprocal US tariff on the European Union will take a toll, no doubt. Combined with soft data, tariffs are further clouding the eurozone's short-term outlook. But European governments have spoken of fiscal stimulus and reforms to bolster domestic economies. This is giving investors confidence about the Eurozone, at least for now anyway. They have talked the talk, let’s see if they will walk the walk.

 

Germany’s recent approval of a substantial €500 billion stimulus package could provide a much-needed boost. The plan aims to revitalise Europe’s largest economy, with increased defence spending potentially lifting not just German GDP but also broader Eurozone growth. Additionally, the stimulus could introduce mild inflationary pressures, creating a more supportive environment for the euro as market sentiment gradually shifts in its favour.

 

EUR/USD outlook: It is mostly about the dollar

 

So, the EUR/USD should have fallen, if investors were not concerned about a bigger hit to the US economy from tariffs than short-term benefits it might enjoy.

 

Proponents of the tougher-than-expected tariffs would argue that people don’t see Trump’s vision and have completely misunderstood the positive impact of these charges. They argue that it is all is about bringing companies back or at least partially back into the US, creating jobs etc.

 

But for the markets it is all about the near term uncertainty that these tariffs and retaliatory measures will have on inflation and growth, and what all that would mean for company profitability and thus the direction of the financial markets.

 

Critics of these tariffs argue that Trump has taken a massive long term gamble on the policy, and that the short term risks could far weight any long term benefits. A weaker global economy, as a result of US tariffs, could reduce US exports growth and thus the terms of trade might not improve materially in the longer term outlook anyway.

 

Indeed, UBS has figured that a permanent implementation of Trump's reciprocal tariffs would result in inflation rising to 5%, due primarily to higher costs of imports.

 

The fact that both stocks and the US dollar have fallen in tandem speak volumes about investors’ confidence in Trump’s trade policy. The argument here is that tariffs will raise inflation and weaken growth, and the Fed won’t be able to do much about it in terms of policy response, with interest rates already being high.

 

So, US and global stagflation is a big worry right now. These worries could only exacerbate if foreign countries now retaliate, and we see further escalation in the trade war.

 

 

But is there any light at the end of the tunnel?

 

Well, Trump can always reverse or reduce these tariffs if global leaders agree to reduce or remove trade barriers. That’s the biggest hope for markets, given fears that central banks wouldn’t be able to do much if inflation rises sharply again.

 

Until we see any signs of major trade deals being discussed, stock market volatility could remain elevated but as we have seen today, that might not stop the EUR/USD from climbing.

 

Technical EUR/USD outlook: Key levels to watch

 

Source: TradingView.com

 

From a technical point of view, the path of least resistance clearly remains to the upside with the EUR/USD chart having broken cleanly above the recent congestion zone around the 1.0900 area.

 

Key support now comes in around the 1.0900-1.1000 area, which was formerly resistance. Only a break back below this range would tilt the EUR/USD outlook negative from a technical point of view.

 

If the bullish momentum continues, the next upside target could be the September 2024 high at 1.1214, followed by round handles such as 1.1300, 1.1400 and finally 1.1500.

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R