EUR/USD Directional Bias in the Face of Tariff War
The ongoing tariff war—particularly between the US and China, but also involving threats of US tariffs on the Eurozone—is exerting a complex but generally bullish bias on the EUR/USD pair in the short term, despite underlying economic headwinds for the Eurozone
Key Drivers of EUR/USD Directional Bias
1. US Dollar Weakness from Trade War Fears
The escalation of US-China tariffs and threats of additional US tariffs on Eurozone goods have led to increased fears of a US recession and higher inflation, both of which are negative for the dollar.
As US companies face higher costs and potentially lower revenues due to tariffs and retaliation, the market expects the US economy to falter faster than others, prompting capital outflows from the dollar and into other currencies, including the euro.
The US Dollar Index (DXY) has dropped to multi-year lows, supporting EUR/USD gains.
2. Euro as a Relative Beneficiary
Despite the ECB's dovish stance and recent rate cut, the euro has benefited from the dollar’s weakness and the perception that Europe may weather the trade war fallout better than the US, at least in the short run.
The Eurozone’s willingness to consider fiscal support measures and the potential for capital repatriation from US assets to Europe further support the euro.
3. Market Sentiment and Positioning
Speculative positioning is increasingly bullish on the euro, with net long positions at their highest since September 2024.
However, commercial hedgers are extending short exposure, suggesting caution and the potential for volatility.
The pair is approaching overbought levels, so while the bias is up, a short-term retracement is possible if the rally becomes overstretched.
4. Risks and Uncertainties
Any signs of de-escalation in the tariff war or a sudden improvement in US-China or US-EU trade negotiations could quickly reverse the euro’s gains.
The Eurozone is not immune to trade war fallout; ECB estimates suggest tariffs could cut Eurozone GDP by 0.5–1 percentage point, which could weigh on the euro if realized
Summary Table: EUR/USD in Tariff War Context
Factor Impact on EUR/USD
US-China/EU Tariff Escalation Bullish for EUR/USD
US Recession Fears Bullish for EUR/USD
ECB Rate Cuts Limits EUR upside
Eurozone Fiscal Support Supports EUR
Market Positioning Bullish, but watch for volatility
Trade War De-escalation Bearish for EUR/USD
Conclusion
In the current tariff war environment, the EUR/USD directional bias is bullish, driven primarily by US dollar weakness and relative safe-haven flows into the euro. However, this bias is fragile—vulnerable to changes in trade policy rhetoric, economic data surprises, and any signs of de-escalation. Near-term, EUR/USD could continue to test higher resistance levels, but overbought conditions and Eurozone economic risks may cap gains or trigger corrections.
The ongoing tariff war—particularly between the US and China, but also involving threats of US tariffs on the Eurozone—is exerting a complex but generally bullish bias on the EUR/USD pair in the short term, despite underlying economic headwinds for the Eurozone
Key Drivers of EUR/USD Directional Bias
1. US Dollar Weakness from Trade War Fears
The escalation of US-China tariffs and threats of additional US tariffs on Eurozone goods have led to increased fears of a US recession and higher inflation, both of which are negative for the dollar.
As US companies face higher costs and potentially lower revenues due to tariffs and retaliation, the market expects the US economy to falter faster than others, prompting capital outflows from the dollar and into other currencies, including the euro.
The US Dollar Index (DXY) has dropped to multi-year lows, supporting EUR/USD gains.
2. Euro as a Relative Beneficiary
Despite the ECB's dovish stance and recent rate cut, the euro has benefited from the dollar’s weakness and the perception that Europe may weather the trade war fallout better than the US, at least in the short run.
The Eurozone’s willingness to consider fiscal support measures and the potential for capital repatriation from US assets to Europe further support the euro.
3. Market Sentiment and Positioning
Speculative positioning is increasingly bullish on the euro, with net long positions at their highest since September 2024.
However, commercial hedgers are extending short exposure, suggesting caution and the potential for volatility.
The pair is approaching overbought levels, so while the bias is up, a short-term retracement is possible if the rally becomes overstretched.
4. Risks and Uncertainties
Any signs of de-escalation in the tariff war or a sudden improvement in US-China or US-EU trade negotiations could quickly reverse the euro’s gains.
The Eurozone is not immune to trade war fallout; ECB estimates suggest tariffs could cut Eurozone GDP by 0.5–1 percentage point, which could weigh on the euro if realized
Summary Table: EUR/USD in Tariff War Context
Factor Impact on EUR/USD
US-China/EU Tariff Escalation Bullish for EUR/USD
US Recession Fears Bullish for EUR/USD
ECB Rate Cuts Limits EUR upside
Eurozone Fiscal Support Supports EUR
Market Positioning Bullish, but watch for volatility
Trade War De-escalation Bearish for EUR/USD
Conclusion
In the current tariff war environment, the EUR/USD directional bias is bullish, driven primarily by US dollar weakness and relative safe-haven flows into the euro. However, this bias is fragile—vulnerable to changes in trade policy rhetoric, economic data surprises, and any signs of de-escalation. Near-term, EUR/USD could continue to test higher resistance levels, but overbought conditions and Eurozone economic risks may cap gains or trigger corrections.
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The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.