The EUR/USD traded below 1.0800 throughout Wednesday’s European trading session, as the US Dollar continued to experience fresh upside interest. This bullish demand was largely fueled by speculators reacting to previous tariff threats made by US President Donald Trump. European investors are widely bracing for the impact of rising trade tensions. The economic picture on both sides of the Atlantic tells two vastly different tales.
In the weeks ahead, European investors will find out first hand that the hard reality of tariff negotiations is the norm. Such discussions may put a damper on the recent gains in both European stocks and the euro. European markets have been on a meteoric rise the last three months, up on an almost straight line. Now, imminent tariff threats threaten to steal that positive momentum. In Germany, business optimism leaps to its highest reading since before last summer. That trend is largely being driven by massive government spending efforts to reinvigorate the manufacturing base.
The clash of views between Europe and the United States is still very much a work in progress. While Germany's fiscal policies promise growth, the UK's economic climate paints a more restrained picture. And just yesterday, the UK’s Office for National Statistics reported that annual CPI inflation fell to 2.8% in February. This is down from 3% in January. The UK stands firmly on a different path than its European peers with respect to budgetary expansion. Because of this, many of us are eagerly anticipating the next UK Budget Report.
Across the Atlantic, uncertainty clouds the US economic outlook as President Trump’s tariff announcements hang like a dark cloud on the economic horizon. Scheduled to go into effect on April 2, these mutually antagonistic tariffs have the potential to drastically change the landscape of world trade. The EUR/USD exchange rate, for example, is extremely sensitive to US data surprises. Actions by the Federal Reserve and subsequent communications only further obfuscate the direction this newly created currency pair is headed. Moreover, dovish rhetoric from the ECB puts additional pressure on the euro against the buck.
Underlying economic data points to a continued rotation trade. Investors are on the move again, actively reevaluating and repositioning their portfolios as economic fortunes shift in a still-fluctuating investment landscape. On the other side of the Atlantic, fiscal optimism is fueling the remarkable European market performance to-date. In stark contrast here in the US, fear and anxiety over trade policies have taken center stage.