EURUSD is bouncing back after more than a week of continuous declines, but this relief may be short-lived. The tightening of trade frictions between the EU and the US, a potentially hawkish PCE inflation reading on Friday, and diverse voices of the European Central Bank (ECB) officials are all pulling the currency pair in different directions, highlighting the risk of high volatility.
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EU Prepares for Tariff Retaliation
The European Commission has held off on retaliatory measures against US goods for now. However, with upcoming reciprocal tariffs set to be announced on April 2 and automobile tariffs taking effect on April 3, EU authorities are preparing a set of trade policy tools for a potential response.
Current tariffs on US imports are up to 2 percentage points higher than those imposed by the US on the EU, covering €26 billion worth of goods (Bloomberg, UNCTAD). While increasing existing tariffs appears to be the simplest solution, the European Council on Foreign Relations (ECFR) warns that room for maneuver is limited, and new tariffs could further disrupt supply chains.
Other potential measures on the table include:
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The Anti-Coercion Instrument (ACI) to counter economic pressure.
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Restricting US companies' access to European capital markets.
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Regulations targeting American Big Tech firms.
ECB: Heated Debate Over April Rate Cut
With three weeks to go until the ECB Governing Council’s next monetary policy meeting, the previously unclear debate on interest rates in the Eurozone is gaining clarity.
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Dovish comments (e.g., Stournaras: “Everything points to a rate cut in April.”) suggest easing.
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Simultaneous concerns about both growth and inflation are emerging, with some officials (e.g., Wunsch) hinting at pausing the rate-cut cycle altogether.
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The ECB remains under pressure to support economic activity amid uncertainty and the potential impact of a trade war.
Over the past week, money markets have increased their expectations for an April rate cut to nearly 80%. Source: Bloomberg Finance L.P.
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