The sharp rally in the euro last week was somewhat counterintuitive.
While the EU was spared from the worst of the tariffs (Asia very much bore the brunt), the 20% levy imposed on the bloc is both very significant and far above expectations. The big fear for markets will be that the tariffs could tip the very open and trade dependent Euro Area economy into a recession, which probably wouldn’t take much given the already fragile state of demand.
Unlike in the US, the trade restrictions are not set to be inflationary for the Eurozone, quite the contrary, and we now see a near certainty that the European Central Bank will cut interest rates again at its next meeting on 17th April (and then perhaps again in June).
Despite the above, the euro has been one of the better performers in the G10 in the past week, emerging as a de facto safe-haven given the currency’s high liquidity and the bloc’s solid current account surplus.
This could remain the case should the EU strike a deal (even partial ones) with the US before Wednesday. European leaders appear open to negotiation, but retaliation remains on the table, with reports yesterday suggesting that 25% counter tariffs were in the offing from 16th May.
The information contained in this document was obtained from sources believed to be reliable, but its accuracy or completeness cannot be guaranteed. Any opinions expressed herein are in good faith, but are subject to change without notice. No liability accepted whatsoever for any direct or consequential loss arising from the use of this document.
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