EUR/USD refreshes over three-month high amid concerns on US economic outlook

• EUR/USD posts a fresh year-to-date high near 1.0670 as the US Dollar weakens amid uncertainty over US growth prospects.
• US President Trump reiterates that reciprocal tariffs to take effect on April 2.
• The ECB is expected to reduce interest rates by 25 bps on Thursday.

EUR/USD extends the prior day’s strong upside move to near 1.0670 in European trading hours on Wednesday, the highest level seen this year. The major currency pair strengthens as investors dump the US Dollar (USD) amid growing concerns about the United States (US) economic outlook. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides to an over three-month low of 105.15.

A slew of events has changed the perception of market participants towards United States (US) President Donald Trump’s tariff agenda. Investors are anticipating that Trump tariffs will slow down US economic growth rather than being pro-growth and inflationary for the economy, which they had projected earlier.

“Given the tight linkages in supply chains across the United States, Mexico, and Canada (USMCA) countries – most notably in the auto industry – tariffs left on for more than a matter of a week or two are likely to have a substantial impact on growth,” Citi said in a report.

The bank also expects a 0.1% decline in the Q1 real Gross Domestic Product (GDP) and expects the Federal Reserve (Fed) to resume its policy-easing cycle, which it paused in December, in the May meeting.

With tariffs now in effect, inflation cooling, equity markets declining, and consumer spending slowing, Citi expects the likelihood of a Fed rate cut in May has swelled.

Meanwhile, 25% tariffs on Canada and Mexico and an additional 10% on China took effect on Tuesday. Moreover, President Trump confirmed that reciprocal tariffs will be imposed from April 2 while addressing Congress on Tuesday.

Daily digest market movers: EUR/USD strengthens ahead of ECB’s policy meeting

• EUR/USD stays firm while investors await the European Central Bank’s (ECB) monetary policy decision, which will be announced on Thursday. The ECB is almost certain to cut its Deposit Facility Rate by 25 basis points (bps) for the fifth time in a row. Therefore, investors will pay close attention to ECB President Christine Lagarde’s press conference after the policy meeting.
• Lagarde is expected to ensure that the monetary policy path is clear but won’t provide a specific monetary expansion plan. Investors would like to know the impact of Trump tariffs and Germany’s debt restructuring to boost defense spending and uplift economic growth in the Eurozone.
• On Tuesday, Germany’s likely next chancellor, Frederich Merz, and the Social Democratic Party (SDP) agreed to create a 500 billion Euro (EUR) infrastructure fund and widen the borrowing limit. Such reforms could escalate inflation in the Eurozone economy. The impact of German debt reforms has resulted in an increase in demand for the Euro.
• Meanwhile, Trump’s tariff agenda could spoil the party for Euro bulls as the Eurozone’s locomotive, Germany, is one of the major auto exporters to the US. Trump has already announced that he will charge 25% tariffs on foreign cars, which is currently 2.5% on automobiles from Germany.
• In Wednesday’s session, investors will focus on the US ADP Employment Change and the ISM Services data for February, which will be published during the North American session. The economic data will influence market expectations for the Fed’s monetary policy outlook.

Technical Analysis: EUR/USD rises above 200-day EMA

EUR/USD posts a fresh over three-month high near 1.0670, recovering above the 200-day Exponential Moving Average (EMA) for the first time since early November. The major currency pair strengthened on Tuesday after a decisive breakout above the January 27 high of 1.0533.

The 14-day Relative Strength Index (RSI) jumps above 60.00. A bullish momentum would trigger if the RSI stays above that level.

Looking down, the January 27 high of 1.0533 will act as the major support zone for the pair. Conversely, the November 6 high of 1.0937 will be the key barrier for the Euro bulls.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.