EURUSD drops over 1% 📌

Trump's powerful trade tariffs support dollar across the market 💵🖋️

Currency pairs linked to the U.S. dollar are opening with strong gaps due to the imposition of trade tariffs on Mexico, Canada, and China. Trump emphasizes that the 25% tariffs on Mexico and Canada (excluding Canadian oil, which is subject to a 10% tariff) and the 10% tariffs on China are aimed at stopping the influx of drugs and illegal immigrants into the U.S. Trade with the U.S. is crucial for North American economies. For Mexico and Canada, exports to the U.S. account for around 15% of their GDP, while for China, it’s about 2%. Considering potential trade restrictions, Bloomberg estimates that U.S. economic growth could be reduced by 1.5 percentage points this year if the tariffs remain in place throughout the year. Canada and Mexico are expected to experience a significantly stronger impact from these trade restrictions.

There are growing doubts about the legitimacy of the tariffs due to their broad scope. Most likely, the tariffs will be challenged in the Supreme Court, making their continuation in their current form uncertain. On the other hand, Canada has already imposed retaliatory tariffs of 25%, and Mexico has announced similar measures. There is no information yet regarding China’s potential response.

The U.S. dollar is strengthening broadly. Against most currencies, the dollar has gained nearly 1%. It has also risen by 2% against the Mexican peso (MXN) and just 0.3% against the offshore Chinese yuan (CNH). However, these moves were previously much stronger. Source: Bloomberg Finance LP, XTB

Market Reaction

Significant volatility is observed in the Forex market in the first part of the day. Investors fear an escalation of the trade war following the weekend announcements. Among the most volatile currencies are the U.S. dollar, the Canadian dollar, and the Mexican peso. Investors are also pricing in the retaliatory tariffs from Canada and Mexico. Canada’s retaliatory tariff plans are already known and are expected to be of similar magnitude to those imposed by the U.S. However, Mexico’s response remains unclear, though it is under consideration.

EURUSD has experienced a significant downward gap, dropping almost to 1.0200 and testing recent local lows from January 13. If the pair closes below 1.0243, it would mark the lowest closing level since November 2022. The issue of EURUSD parity is once again coming into play. Although the tariffs have not yet been imposed on the EU, there is a belief that it is only a matter of time. A White House spokesperson suggested that Trump might revisit the topic of trade tariffs on Europe at the beginning of March, though given the unpredictability of the new president, such a decision could come even sooner. If tariffs were to be introduced next weekend and EURUSD does not recover its losses this week, parity could be seen as early as next Monday’s market opening.

EURUSD is currently testing local lows from the first half of January. If optimism returns to the market, the first key resistance level is around 1.0280, followed by a supply zone below 1.0350. It’s also important to remember that several significant macroeconomic reports will be released this week, including Non-Farm Payrolls (NFP) on Friday.
Source: xStation5