- EUR/USD depreciates due to expected widening of interest rate gap between the United States and the Eurozone.
- President Trump announced plans to impose a 25% tariff on all steel and aluminum imports without naming the affected countries.
- German Chancellor Olaf Scholz warned that the European Union could respond “within an hour” if the US imposes the tariffs.
EUR/USD continues its losing streak for the third consecutive session, trading near 1.0310 during Asian trading hours on Monday. The pair remains under pressure as investors anticipate a widening interest rate gap between the United States (US) and the Eurozone.
The US Federal Reserve (Fed) is now expected to keep interest rates steady this year, following January’s jobs report, which indicated slowing job growth but a lower Unemployment Rate. This development supports the US Dollar and weighs on the EUR/USD pair. Meanwhile, the European Central Bank (ECB) recently cut rates and signaled the possibility of further easing in March.
On Friday, data from the US Bureau of Labor Statistics (BLS) showed that Nonfarm Payrolls (NFP) increased by 143,000 in January, significantly below December’s revised figure of 307,000 and the market expectation of 170,000. However, the Unemployment Rate declined slightly to 4% in January from 4.1% in December.
Speaking aboard Air Force One, US President Donald Trump announced plans to impose a 25% tariff on all steel and aluminum imports without specifying the affected countries. Trump also stated that additional reciprocal tariffs would be revealed by midweek, set to take effect almost immediately, matching the tariff rates imposed by each country, according to Reuters.
In response, German Chancellor Olaf Scholz stated on Sunday that the European Union (EU) could react “within an hour” if the US imposes the proposed tariffs. Separately, Bernd Lange, head of the European Parliament’s trade committee, suggested that to avoid a trade war, the EU is open to reducing its 10% import tax on vehicles to a rate closer to the 2.5% tariff imposed by the US.
Concerns over potential deflationary pressures due to expected US tariffs have intensified odds of deeper ECB rate cuts, with markets now predicting the deposit rate could fall to 1.87% by December.
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: EUR/USD remains subdued around 1.0300 due to fresh Trump tariff threats
