The EUR/USD currency pair hovered near the 1.0400 mark during the early European trading session on Thursday, reflecting a lack of momentum despite a week that began with the significant event of President Trump's inauguration. The financial markets have been closely monitoring President Trump's trade policies, particularly his stance on tariffs. While Trump has threatened to impose tariffs on the Eurozone, his current proposal of a 10% tariff on Chinese imports is considerably less severe than the 60% he suggested during his campaign. This milder tariff prospect has provided a sense of relief to some market participants.
Throughout the week, the US dollar index (DXY) has softened, registering around the 108.25 level. This shift is occurring as the market absorbs the implications of Trump's policies in what is being referred to as Trump 2.0. Although Trump continues to be a significant factor influencing market dynamics, other elements are also at play. For instance, the potential tariffs on China may not materialize as initially feared, serving as another potential false dawn for Chinese markets.
Despite the renewed tariff rhetoric against China, President Trump has refrained from escalating the trade war further. Instead, he has tasked government agencies with reviewing trade practices, with reports due by April 1st. This move has provided investors with some reassurance that a doomsday scenario involving a 60% tariff on Chinese goods may be avoided. As a result, markets are steering clear of panic and focusing on other indicators.
The bond markets have shifted their attention to next week's core PCE data, which is expected to provide further insights into economic conditions. Meanwhile, gold prices have retreated from a nearly three-month high amid rising US bond yields and a strengthening USD. The hawkish stance of the European Central Bank (ECB) and the expectations of rate cuts have also weighed on major currencies ahead of upcoming US data.
Market participants are also considering the possibility of further interest rate cuts by the Federal Reserve, which could deter USD bulls from making new bets. The anticipation of these rate cuts is contributing to a cautious atmosphere in the currency markets.