- EUR/USD remains under pressure as the US dollar appreciates on the likelihood of Trump raising import tariffs and cutting corporate taxes.
- Trump’s fiscal policies could increase inflation risks, which could lead 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 bearish pressure for the second consecutive session, hovering around 1.0720 during Asian trading hours on Monday. The pair is weighed down by a stronger US Dollar (USD) and political uncertainties in Germany.
Investors anticipate a less dovish stance from the Federal Reserve as Donald Trump is likely to make good on his campaign promises to impose substantial tariffs, including a 10% increase in 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, raising inflation risks. This could lead 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 Thursday that he does not anticipate Trump’s possible return to the White House to impact the Fed’s policy decisions in the near term. “We do not guess, speculate, or assume what the government’s future policy decisions will be,” Powell said 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 University of Michigan’s preliminary consumer sentiment index rose to 73.0 in November, up from 70.5 in October and beating the market expectation of 71.0. These encouraging data have greatly strengthened the Dollar.
In Germany, Chancellor Olaf Scholz appointed a new finance minister after dismissing the previous one, effectively dissolving the ruling coalition. This movement has sparked calls from the opposition and business leaders for new elections to bring stability amid political uncertainty.
Analysts at Deutsche Bank noted that higher US tariffs could hit the euro zone’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 and how and when Europe will respond,” they stated.
The Euro FAQs
The Euro is the currency of the 19 countries of the European Union that belong to the eurozone. It is the second most 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 more than $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2 %).
The European Central Bank (ECB), headquartered in Frankfurt, Germany, is the reserve bank of the eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main tool is the increase or decrease in interest rates. Relatively high interest rates (or the expectation of higher rates) tend to benefit the euro and vice versa. The Governing Council of the ECB makes decisions on monetary policy at meetings held eight times a year. Decisions are made by the directors of the Eurozone’s national banks and six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), are an important econometric indicator for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, it forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to their counterparts tend to benefit the euro, making the region more attractive as a place for global investors to park their money.
The published data measures the health of the economy and may have an impact on the euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can 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 raise 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 eurozone economies (Germany, France, Italy and Spain) are especially significant, as they represent 75% of the eurozone economy.
Another important data that is published about 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 during a given period. If a country produces highly in-demand export products, its currency will gain value simply from the additional demand created by foreign buyers seeking to purchase those goods. Therefore, a positive net trade balance strengthens a currency and vice versa in the case of a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
