US Tariffs: Deflationary Risk for Europe?
EURUSD faces a crucial week, marked by key economic events and trade tensions. As US protectionist policies under President-elect Donald Trump could intensify deflationary pressures in Europe.
Impact of U.S. tariffs
While tariffs are often associated with inflation, in Europe they could have the opposite effect due to limited exposure to U.S. imports and their indirect impact on growth and employment. U.S. imports account for only 10% of the total in the Eurozone, with consumer goods barely reaching 6%, limiting the direct impact on prices. However, a 10% across-the-board tariff could reduce economic growth in the Eurozone by 0.3%, affecting employment and wages in key sectors such as manufacturing. On the export side, lower demand for European goods from the U.S. and China could deepen economic problems, although the eurozone previously benefited from the reorientation of global trade. In addition, previous trade disputes showed that a surge in Chinese imports into Europe contributed to disinflationary pressures.
ECB meeting this Thursday
The European Central Bank (ECB) will address a complicated environment of high uncertainty this Thursday, with trade tensions and signs of economic weakness. While no rate changes are expected, statements on the impact of trade tensions and the growth outlook will be crucial in determining the direction of the euro, the tone of the statements will be key to market expectations. A more cautious stance could weaken the euro, while any hint of optimism could give the currency a slight respite. Monetary policy could remain accommodative if economic projections continue to deteriorate.
German trade balance on Friday
Friday's release of Germany's trade balance will offer a signal on the health of Europe's economic engine. A larger surplus could support the euro, but an unexpected deficit, combined with tariff concerns, would reinforce negative sentiment about the eurozone economy.
Between trade tensions and macroeconomic data, EUR/USD could experience high volatility this week, reflecting growing concerns about the European economic outlook.
Progress on the Mercosur-EU agreement
This weekend, Ursula von der Leyen, President of the European Commission, concluded a free trade agreement between Mercosur and the European Union. The first attempt was formally launched in 1999, in negotiations that began as part of a broader cooperation framework established in 1995 (Framework Agreement on Interregional Cooperation). The agreement did not close despite looking promising on its last occasion as it faced multiple interruptions over the years due to disagreements in key areas such as agricultural products, industrial market access, environmental rules and labor rights. After intermittent negotiations, a preliminary agreement was announced in 2019, although its implementation is still pending due to debates over environmental issues. This time the agreement has generated very explosive messages from the Spanish agricultural camp and full opposition from Emmanuel Macron, the current main drivers being Germany and Spain. If finalized, it could boost trade and offer economic respite to both regions. A favorable agreement would strengthen European exports to Latin America, offsetting some of the negative effects of trade tensions with the US.
Technical Aspect
Looking at the 1H. chart, since December 9-10 the market has made a strong upward price recovery rally, with very high trading volume on the current trading day to the upside. The directionality of the euro seems to be trying to recover 1.05996 with the current price at 1.05641. The moving average is determining a possible opening in an upward direction, despite the checkpoint being around 1.05241. RSI is currently in its middle zone at 52.77%.
In this environment full of uncertainties, EURUSD could experience high volatility, reflecting the interplay between trade challenges, ECB decisions and the potential breakthrough in the Mercosur-EU treaty.
Ion Jauregui - Activtrades Analyst
*******************************************************************************************
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and such should be considered a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acing on the information provided does so at their own risk.
Impact of U.S. tariffs
While tariffs are often associated with inflation, in Europe they could have the opposite effect due to limited exposure to U.S. imports and their indirect impact on growth and employment. U.S. imports account for only 10% of the total in the Eurozone, with consumer goods barely reaching 6%, limiting the direct impact on prices. However, a 10% across-the-board tariff could reduce economic growth in the Eurozone by 0.3%, affecting employment and wages in key sectors such as manufacturing. On the export side, lower demand for European goods from the U.S. and China could deepen economic problems, although the eurozone previously benefited from the reorientation of global trade. In addition, previous trade disputes showed that a surge in Chinese imports into Europe contributed to disinflationary pressures.
ECB meeting this Thursday
The European Central Bank (ECB) will address a complicated environment of high uncertainty this Thursday, with trade tensions and signs of economic weakness. While no rate changes are expected, statements on the impact of trade tensions and the growth outlook will be crucial in determining the direction of the euro, the tone of the statements will be key to market expectations. A more cautious stance could weaken the euro, while any hint of optimism could give the currency a slight respite. Monetary policy could remain accommodative if economic projections continue to deteriorate.
German trade balance on Friday
Friday's release of Germany's trade balance will offer a signal on the health of Europe's economic engine. A larger surplus could support the euro, but an unexpected deficit, combined with tariff concerns, would reinforce negative sentiment about the eurozone economy.
Between trade tensions and macroeconomic data, EUR/USD could experience high volatility this week, reflecting growing concerns about the European economic outlook.
Progress on the Mercosur-EU agreement
This weekend, Ursula von der Leyen, President of the European Commission, concluded a free trade agreement between Mercosur and the European Union. The first attempt was formally launched in 1999, in negotiations that began as part of a broader cooperation framework established in 1995 (Framework Agreement on Interregional Cooperation). The agreement did not close despite looking promising on its last occasion as it faced multiple interruptions over the years due to disagreements in key areas such as agricultural products, industrial market access, environmental rules and labor rights. After intermittent negotiations, a preliminary agreement was announced in 2019, although its implementation is still pending due to debates over environmental issues. This time the agreement has generated very explosive messages from the Spanish agricultural camp and full opposition from Emmanuel Macron, the current main drivers being Germany and Spain. If finalized, it could boost trade and offer economic respite to both regions. A favorable agreement would strengthen European exports to Latin America, offsetting some of the negative effects of trade tensions with the US.
Technical Aspect
Looking at the 1H. chart, since December 9-10 the market has made a strong upward price recovery rally, with very high trading volume on the current trading day to the upside. The directionality of the euro seems to be trying to recover 1.05996 with the current price at 1.05641. The moving average is determining a possible opening in an upward direction, despite the checkpoint being around 1.05241. RSI is currently in its middle zone at 52.77%.
In this environment full of uncertainties, EURUSD could experience high volatility, reflecting the interplay between trade challenges, ECB decisions and the potential breakthrough in the Mercosur-EU treaty.
Ion Jauregui - Activtrades Analyst
*******************************************************************************************
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and such should be considered a marketing communication.
All information has been prepared by ActivTrades ("AT"). The information does not contain a record of AT's prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acing on the information provided does so at their own risk.
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