📉Dollar in a trap after rapid tariff changes
Euro is up today on the wave of weakness of the US dollar, which is being harmed by growing fears of a recession in the United States, caused by the drastic customs tariffs announced yesterday by Donald Trump.
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Create account Try a demo Download mobile app Download mobile appEURUSD is gaining the most in many years. Since 2020, we have not experienced any session that would be comparable in terms of growth to today. Source: XTB Research
Moreover, the market fears that such rapid changes in trade will cause the US position as a global economic hegemon to weaken, and the main competitors, Europe and Asia, will become more independent from the "New Continent".
- While the prospects for the US economy are uncertain, investors expect that investments in infrastructure and defense will support the eurozone economy, reducing the negative impact resulting from the trade war.
- The Eurodollar may react dynamically to any signals about negotiations between Europe and the United States, which could potentially lower customs tariffs even to a minimum rate of 10%. At the moment, however, this scenario does not seem likely, and Europe is planning retaliatory tariffs.
Bloomberg analysts believe that the 20.5 percentage point tariff increase introduced so far by the new US administration indicates a 3% drop in GDP and a 1.7% increase in prices, which will probably occur over the next two to three years. However, these are ceteris paribus estimates, because if trading partners impose even more severe tariffs on the US in response, and the Americans respond with severe tariffs on semiconductors/pharmaceuticals, the scale of the GDP decline could be as much as -4.1%, and core PCE could increase by 2.4%.
It is worth noting that EURUSD may experience considerable volatility today, around 4:00 p.m., when we get to know the ISM services from the US, for March. Weaker than forecast data may deepen the dollar's decline and support EURUSD quotes even to the peaks from September 2024, at 1.12. Looking at the chart, we can see that the pair has initiated a strong upward impulse and if its range is similar to the previous one (from the turn of February and March), the base scenario would be a test of the 2024 highs. The final PMI services data from Europe for March turned out to be slightly higher than forecasts.
Source: xStation
On the debt market, we see strong movements of capital outflows from the US. Although the yields on 10-year US bonds are falling to their lowest level since October 2024, reaching 4.06% (-1.8%), much stronger movements are visible in European bonds: the yields on German 10-year bonds are falling to 2.65% (-2.8%). The most noticeable movements are recorded by the change in the yields on Japanese bonds, which are falling to 1.37% (-6.9%). This movement indicates an outflow of capital from the US, which, although partially cushioned by US debt, is mostly transferred to other markets, strengthening the dollar sell-off.
Daily change in yields on 10-year US (pink), German (black) and Japanese (burgundy) bonds. Source: XTB Research, Bloomberg Finance L.P.
