Volatility remained elevated at the start of the new week amid trade war concerns as markets continue to reel from Donald Trump’s tariffs. After a massive slide at the Asian open for global indices and most other risk assets, we saw a bit of an oversold bounce once Europe got underway, with the S&P 500 futures managing a +3.8%jump off their overnight lows but still remained in the red on the session. In Europe, Germany’s DAX was some -7.5% at one stage, before it clawed back a big chunk of those losses. The FX markets were relatively calm after we saw massive swings in risk sensitive pairs like the AUD/USD and NZD/USD last week. But the US dollar was on the rise against emerging market currencies, pointing to increased cautious trading. The euro has managed to hold rather well during all this time, but could we now see the single currency finally drop? The EUR/USD forecast is turning bearish amid investor fears and market realisation that tariffs may be here to stay as Trump digs in, telling reporters that “sometimes you have to take medicine to fix something.” Can the EUR/USD head down towards $1.07 from here, and if it does, why stop there as Trump’s “Liberation Day” tariffs come into effect.

EUR/USD forecast: Tariffs are supposed to be bad news for euro

Aren’t tariffs supposed to be bad for the euro? Sure, and over the longer term, they could be very damaging for the eurozone economy and thereby the single currency. But last week, the market’s fixation was firmly on the US dollar—and it’s been a wild ride since last that reciprocal tariff announcement.  The fact that both equities and the greenback initially dropped together says it all: investor confidence in Trump’s trade strategy is shaken. Concerns are mounting that these tariffs could fuel inflation while dampening growth, leaving the Fed boxed in with little wiggle room given already-high interest rates. 

But that can only mean one thing: Stagflation – hot inflation and low growth for the US economy.

The Eurozone economy could suffer even worse. Here, the central bank is already on a dovish path. Against this backdrop, the EUR/USD will do very well to hang around the current levels of around $1.10. I think there is now increased risks of a drop towards $1.05 handle.

Thus, the EUR/USD forecast is no longer as constructive as it appeared just a couple of weeks ago and now the risks are tilted to the downside as we approach the go-live date for reciprocal tariffs.

How bad are reciprocal tariffs for the euro?

A 20% reciprocal tariff from the US on the European Union is no small blow—and when paired with weaker economic data, it’s muddying the short-term outlook for the eurozone. That said, there’s a sliver of optimism holding things up: fiscal stimulus and reform pledges from European governments.

The euro is hanging on to that optimism—for now – albeit it is losing momentum as the more immediate concerns are those tariffs. Germany’s recent green light on a massive €500 billion stimulus package did the trick last week, but it may not be enough to prevent it from sliding this week. European leaders have agreed to come up with counter measures to tariffs, but this is a lose-lose situation for all parties involved.

Looking ahead to the rest of this week

US reciprocal tariffs implementation

Tuesday, April 9

05:01 BST

Trump’s April 2 “Liberation Day” plan introduced aggressive reciprocal tariffs on countries with high trade surpluses and barriers to US goods, last week. This triggered counter measures from the likes of China and caused panic selling across financial markets. If Trump decides to ease those measures ahead of the go-live date, then markets may stage a relief rally. The 10% baseline tariff went into effect at 12:01 am EDT (05:01 BST) on Saturday, April 5, while the higher reciprocal tariffs are set to go into effect on the above date.

US CPI

Thursday, April 10

13:30 BST

Headline inflation is expected to ease to 2.6% from 2.8% previously. But with trade war at the forefront of investors’ minds, we may not see a massive market reaction to CPI this time. Just like Friday’s stranger’s non-farm payrolls report failed to cause any shifts in markets, as US rates were already being priced lower amid deteriorating trade war risks.

UoM Consumer Sentiment

Friday, April 11

15:30 BST

Consumer confidence is plunging amid trade war uncertainty, and this is something that needs to be watched closely because falling confidence will impact spending and therefore cause all sorts of economic issues.

EUR/USD technical analysis

Source: TradingView.com

The key support area on the EUR/USD chart that needs to hold is at 1.0900-1.09500 region (marked in grey on the chart). If this area gives way, as I suspect that it might, then a quick drop to 1.0800 support could be on the cards. Below that the 200-day average and recent low at 1.0733-1.0740 comes into focus. Then, there just a void until 1.0630.

Resistance is seen at 1.1000 now, followed by 1.1125.

— Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R