Euro Exchange Rates Hold Steady Despite Trump 25% EU Tariff Threat

February 27, 2025 - Written by Frank Davies

STORY LINK Euro Exchange Rates Hold Steady Despite Trump 25% EU Tariff Threat

President Trump pushed back tariffs on Canada and Mexico, but then threatened the EU with 25% tariffs.

The market reactions to his comments have been getting milder. EURUSD dropped around 30 pips but recovered again.

Defense spending in the EU is likely to increase, potentially pushing up growth and inflation and supporting the euro.

"Risk off” has been the theme of the week, with stocks lower and bonds higher. Nvidia earnings on Wednesday were the main focus of the week and while they impressed by beating on EPS and sales, the reaction in the stock was less impressive as it fell in after-hours trading. This key stock may be rolling over.

Currencies have stayed steady, with only USDJPY showing higher volatility as yields in US and Japan converge (US down, Japan up). This is putting pressure on the carry trade and could be weighing on stock markets.

There was good and bad news for currencies on Wednesday as the threat of tariffs on Canada/Mexico were pushed back again. However, Trump made fresh threats on the EU, proposing a 25% tariff on EU cars and other goods, stating the move would come “very soon.” His comments follow a sharp critique of the European Union, claiming “the European Union was formed in order to screw the United States.” When asked about potential EU retaliation, Trump dismissed the possibility, saying, “They can’t. I mean, they can try, but they can’t.” This underlines a worrying rift between Washington and Brussels, but Trump’s threat of tariffs on the EU had little effect on the euro as markets now assume – perhaps dangerously – the threat will not be carried through. As ING note:

“The tariff threat remains real, although it is having a diminishing impact on markets. President Trump's threat yesterday that the EU (some sectors or the whole bloc?) would be hit with 25% tariffs in April only saw EUR/USD come off 20-30 pips.”

Despite the occasional threat, the prospect of concrete tariffs looks slim until April which could weigh on the US dollar in the near-term.

Spending Could Support the Euro

The EU’s rift with Washington and pledge to support Ukraine for as long as it takes will require extra defense spending. Thiis is high on the agenda in the G20 meeting and the Irish finance minister has said that national spending will have to rise first as speed is of the essence.

Governments may have to break rules on borrowing, and while this is dangerous in the long-term, it may provide a much-needed boost to the euro in the short-term. Increased fiscal spending would support growth and push up inflation. Consequently, the ECB may dial back on cuts in response.

As ING point out,

“The ECB has been dropping more hawkish hints ahead of the pre-meeting black-out period. Press reports backed by ECB sources indicate that the inflation forecast for 2025 could be nudged up.”

A 25bps cut is almost guaranteed next week, but markets are unsure of whether they will follow it up directly in April. A 60% probability is currently assigned, although it is perhaps a mute point – whether it comes in April or in subsequent meetings, markets assume the cuts will continue and target a rate of 1.75% to 2% by the end of the year. This is assumed to be the neutral rate.

A massive ramp up in EU defense spending could gradually shift these expectations and lift the euro, but it won’t be an immediate driver and since will initially rely on individual countries, the effect could be patchy.

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TAGS: Euro Dollar Forecasts