The Euro has been under significant downward pressure. This comes on the heels of former President Donald Trump’s latest threat to slap a mind-blowing 50% tariff on EU imports. This announcement has sent shockwaves through the currency markets, but the most profound effect has been seen in the EUR/USD and EUR/JPY currency pairs.
EUR/USD
The EUR/USD is the most traded currency pair on earth, accounting for around 30% of all currency trades. At the same time, the EUR/JPY is the second most popular cross currency pair that includes the Euro, having a 4% share of total transactions.
The Eurozone is currently made up of 19 member countries. Their hope rests on their robust economy and interest rates boosting demand for the Euro and thus the value of the Euro. So the ECB shouldn’t rule out cutting interest rates further. This Easter egg scenario underscores the pervasive uncertainty surrounding the future of the Euro. Germany, France, Italy and Spain, the four largest economies in the Eurozone, represent 75% of the Eurozone economy. Their economic data, mostly published this week, will set the tone for investor sentiment over the next few months.
Impact of Trump’s Tariff Threats
As a result, Trump’s recent blistering about tariffs has caused panic in financial markets. He stated, “Our discussions with them are going nowhere! Therefore, I am recommending a straight 50% tariff on the European Union, starting on June 1, 2025. There is no tariff if the product is built or manufactured in the United States. Thank you for your attention to this matter!”
These comments have taken a toll on the Euro. They have ignited concerns about an escalation of trade tensions between the United States and Europe. For the Eurozone, investors are concerned about the negative effect of European tariffs on trade balances and economic growth. This concern further complicates the picture for the Euro as it readies itself for potential interest rate cuts.
The Euro has fallen sharply against most other major currencies. As investors have been reacting to these changes, EUR/JPY has moved up and down in a volatile manner. Analysts are warning that the tariff threats have already begun to roil the currency markets. They share our concern that possible changes to ECB policy could further contribute to this volatility.
The Role of Economic Data
The economic performance of individual Eurozone member states will be crucial in deciding the Euro’s future. As such, Germany’s, France’s, Italy’s, and Spain’s reports will receive the most attention—and scrutiny. These three countries account for nearly 40% of the output of the combined seven-member Eurozone. Stronger-than-expected economic data would help restore confidence in the Euro and counteract some of the negative effects from Trump’s tariff threats.
In addition, analysts have raised red flags that Japanese economic indicators have recently been surprisingly strong. “Hotter-than-expected Japanese consumer inflation, especially the core inflation hitting an over two-year high, should increase the odds of a BoJ rate hike in July,” remarked analysts at ING. All these events might place additional downward weight on the EUR/JPY cross. Investors are still very much trying to assess the relative impact of shifts in Japanese monetary policy compared to those in the Eurozone.
As economic conditions evolve, market participants will closely monitor inflation trends and growth forecasts to gauge how these factors interplay with trade relations and central bank policies.
Interest Rates and Currency Fluctuations
At a high level, interest rates are one of the most powerful drivers of currency value. Depending on the outcome of the ECB’s delayed decision on lowering interest rates, the value of the Euro could be dramatically affected. Over the last few years, particularly high interest rates in the Eurozone have positively impacted the Euro by drawing foreign investments that pursue higher returns. Any sign of a move toward lower rates would reduce that attractiveness.
Changes in EUR/JPY usually indicate a shift in overall economic mood. In most cases, these changes would be the result of trade disputes and decisions regarding monetary policy. Traders will be particularly attentive to the state of U.S.-EU trade relations. They will look for any signals from the Bank of Japan on interest rates.
The interplay between these factors underscores the complexity of currency trading and the importance of staying informed about international economic conditions. Continued uncertainty hangs over trade policies and central bank actions. Commodity traders and investors need to be on their toes with their strategies.