The euro rose to a near two-month high amid the postponed reciprocal tariffs by Trump and his push for Ukraine war peace talks. However, the rebound in the common currency may be only short-lived.
The euro rebounded against the US dollar, with the pair of EUR/USD rising to near 1.05 in early Asian session on Monday, the highest seen on 18 December after briefly hitting this level in late January. The euro’s rebound has been attributed to two fundamental factors – a delayed reciprocal tariff of the US and the Ukraine war peace talks.
Lowered inflation outlooks buoy the euro
Last week, US President Donald Trump delayed the proposed reciprocal tariffs while initiating peace talks to end the Ukraine war. Markets became less concerned about a potential resurgence in inflation, likely driven by Trump’s sweeping tariffs. It seems that Trump has been using the tariff threat as a negotiating tool rather than a reckless economic weapon. He has not actually materialised any of his pledged tariffs on other countries, except for a 10% levy on China so far.
Additionally, crude oil prices accelerated their decline after President Trump said he had a “lengthy and highly productive” call with Russian leader Vladimir Putin last Wednesday. Traders expected the negotiation might involve relaxing Russia’s oil exports, in turn reducing the upside pressure on inflation. Both West Texas Intermediate (WTI) and Brent futures fell to near their lowest levels this year last Friday.
Lowered inflation expectations sent the US dollar down while lifting all the other currencies in the G-10 group, particularly the euro and the British Pound. A potential ceasefire of the three-year Ukraine war has also sparked optimism regarding Europe’s economic outlook, “Traders are pushing the euro and Pound higher in trading today as a “double win” trade. The prospects for peace in Ukraine are rising, lifting sentiment around the European economy, and the US dollar is sliding as extreme post-election optimism fades,” said Michael McCarthy, a market strategist and Chief Commercial Officer at Moomoo Australia.
The euro relief could be only temporary
The sustainability of the Euro’s rebound remains questionable as Trump’s tariff threat and the complexity of the ceasefire talks remain highly uncertain.
Following Trump’s decision to postpone a reciprocal tariff plan, the US president said to reporters in the White House that he would unveil new tariffs on automobiles on 2 April last Friday, stepping up his tariff threats to the US trading partners, especially the EU. The sweeping reciprocal tariffs are currently pending the US Commerce Department’s investigation, which is expected to be completed on 1 April. Previously, he emphasised that tariffs on autos, computer chips, and pharmaceuticals would be charged for higher rates, which would be “over and above” the reciprocal tariffs.
The peace talks could also be a lengthy process. Hosted by French President Emmanuel Macron, a group of EU leaders, including Germany’s Olaf Scholz and Italy’s Giorgia Meloni, are gathering in Paris to discuss the joint military defence spending package for the continent today. The UK’s Prime Minister Keir Starmer is also expected to join the meeting, aiming to enhance Europe’s military presence in post-war Ukraine amid Trump’s push to end the conflict. President Trump has called for the EU to be responsible for its own securities, adding to the urgency for the block to unify its defence forces. However, this could be a challenge for the eurozone and the UK as both countries have been making efforts to reduce government deficits. If the EU increases defence spending, it may have to raise more debt, which could put pressure on the euro.
Adding to all the uncertainty, the German snap election will take place in less than one week, which may also weaken the Euro’s prospect at this moment. Ultimately, a strong US economy and a fragile Europe will likely continue to support a strong dollar against the common currency. “My stance remains bullish USD,” Michael Brown, a senior research strategist at Pepperstone in London, wrote in a note, “Ongoing US economic outperformance should see both the buck and stocks continue to press higher, albeit in choppy fashion,” he added.
