Chart of the day: EURUSD (03.04.2025)

A day after "Liberation Day", EURUSD has officially erased the entire Trump Trade, which had driven the U.S. dollar higher up until the January inauguration of the American president. The cautious pricing of Trumpian protectionism, as well as the presumed market-friendly stance of Trump, have proven to be off the mark, opening the door for investors to new concerns about recession and inflation.

Source: xStation5

What’s at Stake in the Trade War?

10% on everything, 20% on the EU, 54% on China, and many more. The scale of the imposed tariffs has significantly exceeded expectations, underscoring the risk of further escalation from U.S. trading partners.

Donald Trump’s speech centered around revitalizing American industry. With tariffs in place, the U.S., previously flooded with goods from "unfair partners", is expected to be covered with new factories, restoring the American dream for the average citizen. While long-term investment capital may indeed create new jobs in the U.S., the coming months will likely bring significant stagflation risks.

Today's depreciation of the U.S. dollar is the first major headwind for the Republican administration. Trump vowed that “foreign countries will pay” for protectionism, yet a weaker dollar hurts U.S. importers, who will now pay more for taxed foreign goods.

Recession expectations are rising, pushing bond yields in the EU and U.S. off a cliff. Source: xStation5

EU's Response on the Horizon

The upcoming EU retaliation won’t help the situation either. Ursula von der Leyen has expressed a preference for dialogue over a “carrot and stick” approach, but her statement did not lack a clear readiness for retaliation. The European Commission is finalizing its response to the steel and aluminum tariffs, with additional measures prepared in case the Trump administration refuses to soften its protectionist stance.

ECB: To Cut or Not to Cut?

The trade nightmare has come true, and the market is clearly pricing in weak economic growth in the Eurozone, estimating a 90% chance of another rate cut. According to ECB analyses, EU countermeasures will further deepen potential GDP losses, increasing the pressure for monetary easing.

In today’s Bloomberg interview, ECB Governing Council member Yannis Stournaras stated that tariffs are not an obstacle to an April rate cut, despite their expected blow to Eurozone economic growth.

Money Market Pricing Surged Nearly 10 Basis Points After Liberation Day. Source: Bloomberg Finance L.P.