• EUR/USD surrenders some of its early gains as US President Trump proposes 50% tariffs on the Eurozone.
  • Trump’s new tax bill is expected to increase the nation’s debt by $3.8 trillion over a decade.
  • The US Dollar remains weak as concerns over US fiscal imbalances persist.

EUR/USD gives up some of its initial gains during North American trading hours on Friday after revisiting the two-week high around 1.1370 earlier in the day. Still, the major currency pair is up around 0.5% near 1.1330. The pair faces selling pressure after United States (US) President Donald Trump threatened to impose 50% flat tariffs on imports from the European Union (EU) through a post on Truth.Social.

"Our discussions with them are going nowhere! Therefore, I am recommending a straight 50% tariff on the European Union, starting on June 1, 2025. There is no tariff if the product is built or manufactured in the US. Thank you for your attention to this matter!" Trump wrote.

Additionally, US Treasury Secretary Scott Bessent stated in an interview with Fox News during North American trading hours that President Trump believes "EU proposals have not been of good quality". Bessent added, "Most countries are negotiating in good faith, except the EU," and highlighted that many Asian countries have come with "very good deals".

Investors were already uncertain about the potential EU-US bilateral deal after Washington’s trade negotiator warned that discussions could not advance if the old continent doesn’t offer unilateral concessions.

Earlier in the day, a report from the Financial Times (FT) showed that US Trade Representative Jamieson Greer would tell European Commission (EC) Commissioner for Trade and Economic Security Maroš Šefčovič that the recent “explanatory note” shared by Brussels for the talks falls short of US expectations. The report also stated that, unlike some other trading partners, the EU has offered mutual tariff reductions, not unilateral concessions. The explanatory note shared by Brussels also lacked any new concessions relating to the digital, as the US has demanded

Signs of trade tensions between the US and the EU are unfavorable for the Euro (EUR), given that the continent has a huge trade surplus over Washington. According to the Office of the US Trade Representative, total goods traded between Washington and Brussels were estimated at $975.9 billion in 2024, out of which Washington imported $605.8 billion worth of goods from the EU.

Daily digest market movers: EUR/USD stays firm amid weakness in US Dollar

  • EUR/USD is still positive to near 1.1330 as the US Dollar (USD) slumps after a short-lived recovery on Thursday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines to near the two-week low around 99.30.
  • Financial market participants continue to dump the US Dollar as the new tax bill by United States (US) President Donald Trump has increased concerns over the nation’s fiscal health. The new bill comprises tax cuts and higher spending on defense and immigration controls, among others, and it is expected to increase the national debt by $3.8 trillion over the next decade, according to the nonpartisan Congressional Budget Office.
  • Investors are worried that the additional burden on the nation’s debt could lead to further erosion of the US credit rating. Last week, Moody’s downgraded the US sovereign credit rating by one notch to Aa1 from Aaa, citing the failure of successive administrations and Congress to agree on measures to “reverse the trend of large annual fiscal deficits and growing interest costs”. 
  • The scenario of a long-term issuer rating downgrade could lead to an increase in borrowing rates for the government, which limits the spending capacity for future generations or makes borrowing more expensive for them.
  • The imposition of Trump’s new bill is also expected to accelerate consumer inflation expectations, assuming that tax cuts for households result in an increase in the overall spending and eventually boost price pressures. The scenario would discourage Federal Reserve (Fed) officials from reducing interest rates.
  • Fed officials have been guiding that monetary policy adjustments are not appropriate at the current juncture, as uncertainty over the economic outlook under the leadership of US President Trump is unusually high.
  • In the Eurozone economy, Q1 Negotiated Wage Rates data, a key wage growth measure, has come in lower at 2.38% against 4.12% seen in the last quarter of 2024. A sharp slowdown in the wage growth measure is expected to encourage European Central Bank (ECB) officials to lower interest rates further. Traders are increasingly confident that the ECB will reduce its key borrowing rates again in the June policy meeting.
  • However, ECB policymaker and Bundesbank President Joachim Nagel expressed caution on further interest rate cuts at the sidelines of the G7 meeting in Canada on Thursday. "After seven interest rate cuts, our deposit rate stands at 2.25%, a level that can certainly no longer be described as restrictive," Nagel said, Reuters reported. He stated that borrowing costs are “no longer a drag on the Eurozone economic growth”.
  • The Euro underperformed on Thursday after the release of the weaker-than-projected HCOB Purchasing Managers’ Index (PMI) data for May. The PMI report showed that the overall business activity surprisingly declined as the service sector output contracted unexpectedly.

Technical Analysis: EUR/USD faces pressure near 1.1370

EUR/USD faces selling pressure after revisiting the two-week high near 1.1370 on Friday. However, the near-term outlook of the pair remains bullish as it holds the 20-day Exponential Moving Average (EMA), which is around 1.1255.

The 14-period Relative Strength Index (RSI) rises to near 60.00. Bulls would come into action if the RSI breaks above that level.

Looking up, the April 28 high of 1.1425 will be the major resistance for the pair. Conversely, the psychological level of 1.1000 will be a key support for the Euro bulls.

Tariffs FAQs

Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.

Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.

There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.

During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.

Source: Fxstreet