Let’s face it, the 5th of November last year was a massive global event, as it confirmed the return of Donald Trump to the White House. Following his decisive victory, the Euro went into free fall due to fears about how Trump 2.0 might impact the market. The lingering concern over potential incoming tariffs weighed heavily on investors’ minds, with many rushing to safety in the form of the US Dollar.
However, come the big day of January 20th, when Trump was sworn in, the market sighed with relief as no immediate tariffs were applied, and the EUR/USD bounced back from a low of 1.01830.
But this is not the time for much rejoicing. Just because Trump’s tariff plan hasn’t been implemented yet doesn’t mean it won’t become a reality. There are questions about whether Trump’s tariff threat is just a bargaining tool. For example, consider the recent US spat with Colombia, where Trump threatened a 25% tariff on all goods coming from Colombia unless the country accepted deported migrants. He got his way and held off on imposing the tariffs. This may have looked like a game of who blinked first, but the threat of tariffs remains very real.
The single currency also faces other challenges. There are clear signs of economic slowdown, with Germany’s GDP for Q4 being reported at -0.2%, and the EU GDP for Q4 coming in at 0.9% vs. the expected 1.0%.
Now, the ECB, has started 2025 with another interest rate cut of 0.25 basis points. The market anticipates that the European Central Bank will make three more rate cuts this year, with a target of 2% by year’s end.
This is in stark contrast to the actions of the Federal Reserve, the world’s most powerful central bank, which held rates steady last night with no commitment to future cuts.
With both central banks going in opposite directions, it could very well be the actions of the ECB that determine whether the Euro will hit parity with the mighty USD.
Can the European Central Bank change course and avoid being so aggressive with its rate cuts, especially considering that the Eurozone’s annual inflation rate in December was reported at 2.4%? Or, given the signs of economic slowdown, the ongoing Ukraine-Russia conflict, and the fear of incoming tariffs, will the ECB have no choice but to watch the EUR/USD fall to parity?
By James Trescothick
Head of Market Research and Market Analysis
