The EUR/USD pair recovers modestly to trade near 1.0490 during Tuesday’s Asian session, paring earlier losses. However, the pair remains under pressure amid market concerns over tariff hikes proposed by President-elect Donald Trump, as well as economic headwinds in the Eurozone.
US Dollar Dynamics
The US Dollar (USD) is subdued despite dovish remarks from Federal Reserve (Fed) officials. Still, strong preliminary S&P Global US Purchasing Managers’ Index (PMI) data is providing support, as it fuels expectations of a cautious and gradual approach to further rate cuts by the Fed.
Chicago Fed President Austan Goolsbee signaled that the central bank is likely to guide interest rates toward a neutral level, which neither stimulates nor restricts economic activity. Minneapolis Fed President Neel Kashkari echoed this sentiment, suggesting that a December rate cut remains on the table.
Impact of Trump’s Tariff Plans
Market sentiment has been dampened by Trump’s announcement of plans to impose a 25% tariff on imports from Mexico and Canada and a 10% hike on Chinese goods entering the US. These measures raise fears of global trade disruptions and inflationary pressures, contributing to cautious USD movements while increasing risks to global currencies, including the Euro.
Eurozone Weakness and ECB Expectations
The Euro continues to face pressure amid growing concerns about the Eurozone’s economic trajectory. Key risks include uncertainties related to a potential second Trump administration, the ongoing conflict in Ukraine, and political instability in Germany and France.
Market participants have fully priced in a 25 basis point (bps) rate cut by the European Central Bank (ECB) in December, with odds for a larger 50 bps cut rising to 58%. This reflects heightened pessimism about the region’s economic prospects, further weighing on the Euro’s strength.
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