EUR/USD surrenders some gains as Trump prepares to impose reciprocal tariffs

• EUR/USD retreats from the intraday high of 1.0440 as investors brace for high uncertainty as US Trump is poised to impose reciprocal tariffs.
• The Federal Reserve is expected to keep interest rates steady for longer.
• ECB Vujčić is comfortable with market expectations of three more interest rate cuts this year.

EUR/USD gives up some gains and drops to near 1.0400 from the intraday high of 1.0440 as the US Dollar (USD) rebounds in Thursday’s North American session. The US Dollar bounces back as United States (US) President Donald Trump reiterates threats to impose reciprocal tariffs in a post on his Truth Social account. "Three Great Weeks, Perhaps The Best Ever, But Today Is The Big One: Reciprocal Tariffs!!! Make America Great Again!!!," Trump said.

On Wednesday, the White House reported that Trump is expected to announce reciprocal tariffs before meeting with Indian Prime Minister Narendra Modi on Thursday.

The impact of reciprocal tariffs will be negative for the Eurozone economy. Reciprocal tariffs would result in an increase in tariffs on imports of European vehicles to 10%  from the current 2.5% levy. The US is the second-largest market for the European Union (EU)  automobile exports after the United Kingdom (UK). Over 20% of total EU auto exports were taken by the US in 2023, according to ACEA. 

This scenario would result in a trade war between Europe and the US as European Commission President Ursula von der Leyen warned on Tuesday that the EU would act to “safeguard its economic interests” and is ready for “proportionate countermeasures.” Her comments came after Trump imposed 25% tariffs on all imports of steel and aluminum and said these tariffs “will not go unanswered”.

Meanwhile, the outlook of the Euro is already vulnerable due to weak Eurozone economic performance and firm expectations that the European Central Bank (ECB) will extend the monetary easing cycle as inflationary pressures are on track to return sustainably to the 2% target by the year.

On the monetary policy front, ECB policymaker and Governor of the Croatian National Bank Boris Vujčić said in an interview with Reuters that market expectations for three more interest rate cuts this year are not "unreasonable". Vujčić added that the ECB could remove the reference to 'restrictive policy' already in the March policy statement and explained that rate cut predictions are based on expectations for a "quick fall in services inflation" in the coming months.
The major currency pair surrenders some gains

Daily digest market movers: EUR/USD surrenders some gains as Trump reciprocal tariffs linger

• EUR/USD surrenders some of its intraday gains that were driven by a significant increase in investors’ risk appetite. Market sentiment turned favorable to constructive development of the Russia-Ukraine conflict since both countries agreed to begin peace talks. 
• Market sentiment turned cheerful after US Trump confirmed that he had a “lengthy and highly productive” conversation with Russian leader Vladimir Putin, who agreed to start peace negotiations with Ukraine.
• US Defense Secretary Pete Hegseth stated on Wednesday that Ukraine should stop seeking membership into the NATO alliance and reconsider its goals of reclaiming territory seized by Russia.
• A constructive attempt by US President Trump to end the three-year-long bloodshed has strengthened the appeal of risk-sensitive assets, such as the Euro (EUR). The Russia-Ukraine truce would help fix the Eurozone energy crisis and the global supply chain. Such a scenario is expected to be favorable for the Euro.
• The US Dollar (USD) had faced a sharp sell-off after positive headlines on Russia-Ukraine truce talks as investors showed back to safe-haven assets. However, it has recovered some gains amid uncertainty over reciprocal tariffs. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds from the intraday low of 107.50 to near 107.85. 
• The outlook for the US Dollar was already firm as the hotter-than-expected  Consumer Price Index (CPI) report for January has provided enough justification to Federal Reserve (Fed) officials to hold interest rates in the current range of 4.25%-4.50% for a longer period. Over that, the faster-than-expected increase in the Producer Price Index (PPI) data for January has also boosted expectations that the Fed will keep interest rates higher for longer. The Bureau of Labor Statistics (BLS) showed that the annual headline producer inflation grew by 3.5%, faster than estimates of 3.2% and the December reading of 3.3. In the same period, the core PPI - which excludes volatile food and energy prices - grew at a faster pace of 3.6% than estimates of 3.3%. However, the growth of the underlying inflation was slower than the former release of 3.7%, upwardly revised from 3.5%.
• Analysts at Macquarie have reinforced their call that the Fed will remain on “long hold in 2025” and no change in the fed funds rate on “January’s hot CPI report.” They initially guided their long-hold call after the release of the strong employment report for January, which was released on February 7.

Technical Analysis: EUR/USD struggles around 50-day EMA

EUR/USD extends its winning streak for the third trading day on Thursday. The major currency pair climbs above 1.0400 and gives a tough fight to the 50-day Exponential Moving Average (EMA), which trades around 1.0424.

The 14-day Relative Strength Index (RSI) oscillates in the 40.00-60.00 range, indicating a sideways trend.

Looking down, the January 13 low of 1.0177 and the round-level support of 1.0100 will act as major support zones for the pair. Conversely, the psychological resistance of 1.0500 will be the key barrier for the Euro bulls.