Eurozone could avoid recession but 'massive' uncertainties remain

Matthew Ryan, CFA Ebury

The US imposed a 20% tariff on the European Union last week. Given the wobbly state of the bloc's economy, this may be enough to tip it into a recession.

On the other hand, the impact of the massive German fiscal stimulus, and others that will probably follow, may be enough to counteract at least some of the contractionary impact of trade.

The main issue here of course is that the impact on growth of the tariffs will be almost immediate, whereas the fiscal stimulus measures will take time to filter through to the economy, and may not be felt in earnest until 2026.

What is clear is that we face massive uncertainty, both with regards to the evolution of the EU economy and its currency.

The initial response of markets was to treat the common currency almost like a safe-haven, which soared to its strongest position since October - dollar outflows have to go somewhere, and the euro is the most liquid alternative to the greenback.

As of late-last week, the move in the euro faded somewhat, albeit the EUR/USD exchange rate is now back trading above the 1.10 level.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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