Euro to Dollar Forecast: EUR/USD Drops as US-EU Trade War Escalates

March 13, 2025 - Written by Ben Hughes

STORY LINK Euro to Dollar Forecast: EUR/USD Drops as US-EU Trade War Escalates

Risk markets are fading lower again and the Euro (EUR) is retracing some of its recent rally against the US Dollar (USD). This comes despite better-than-expected inflation readings in the US. The trade war has escalated in the last 24 hours and the EU is in Trump’s sights.

There was a peculiar reaction to Wednesday’s cooler CPI readings in the US. After a strong rally, stocks faded back into the red, while the US dollar reversed higher. Not only that, the odds of rate cut in May from the Fed fell from 40% to 30%.

This was not the expected reaction – fears of inflation have been weighing on risk markets so the lower-than-expected readings should have given them a significant boost. There were several possible reasons for the reaction.

Firstly, the February data may be the calm beofre the storm. Tariffs are expected to significantly increases inflation over the coming months as prices of imports increase and are passed on to consumers. This has only just started happening.

Secondly, President Trump took credit for the better inflation readings with a post on Truth Social stating,

“The price of eggs have come down, interest rates have come down, gasoline prices have come down—It's all coming down!”

The problem – at least for markets – is that Trump’s policies seem to be tackling inflation, at least in the short-term. This encourages more of the same policies and Trump has taken to social media to air his thoughts.

“The U.S. doesn’t have Free Trade. We have “Stupid Trade.” The Entire World is RIPPING US OFF!!!,” he posted on Thursday.

Indeed, the last 24 hours have been awash with trade war threats., with the EU now firmly in the crosshairs.

“The European Union, one of the most hostile and abusive taxing and tariffing authorities in the World, which was formed for the sole purpose of taking advantage of the United States, has just put a nasty 50% Tariff on Whisky. If this Tariff is not removed immediately, the U.S. will shortly place a 200% Tariff on all WINES, CHAMPAGNES, & ALCOHOLIC PRODUCTS COMING OUT OF FRANCE AND OTHER E.U. REPRESENTED COUNTRIES.”

This has hit the euro and EURUSD is down 0.4% at 1.085 having reached a peak of 1.095 earlier this week. Tariffs threaten the still-fragile EU economy and could lead to further aggressive cuts from the ECB in a bid to support affected businesses.

The Bank of Canada has taken a similar approach and lowered rates by 25bps yet again this week, taking the rate to 2.75%. This marks 225bps of cuts since June 2024, when rates peaked at 5%. The statement blamed US-Canada trade tensions as a potential drag on growth and a driver of inflation. As ING noted on Wednesday,

“The Bank continues to acknowledge “more than usual uncertainty” due to trade tariffs and has a sense that this uncertainty is “restraining consumers’ spending intentions and businesses’ plans to hire and invest." After all, 76% of Canadian exports go to the US, equivalent to 20% of Canadian GDP – so even a modest drop in exports could risk a recession.”

Cutting rates will help the economy but they are only now around neutral rates – if stimulus is required to avoid a recession they may have to go much lower and this prospect should keep the Canadian Dollar and euro suppressed and the US dollar bid. So far, there are no signs of inflation making a comeback but both the BoC and ECB will have a challenging year trying to balance out growth and inflation with a messy trade war constantly evolving in the background.

Euro to Dollar Exchange Rate Technicals: Short-Term

According to FX strategists at Scotiabank, the short-term outlook remains neutral.

"EURUSD continues to consolidate. Spot losses are extending for a second day and testing support in the upper 1.08s but the broader, technical undertone remains constructive and dips to the low/mid 1.08 area should remain supported. Key short-term support is 1.0805. Resistance is 1.0950 and 1.10."

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TAGS: Euro Dollar Forecasts