Euro Dumped on Trade Positivity
- Written by: Gary Howes
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Trade wars have been good to the Euro...
It therefore stands that a resolution to that war will deprive it of fuel to further its rally against the Dollar.
This is evident in midweek price action as investors sense we are in the final lap of a fast and turbulent period of global trade reorganisation orchestrated by U.S. President Donald Trump.
The Euro is down against all its G10 peers after Trump welcomed a new trade accord with Japan, whom he has long accused of enjoying an unfair trade advantage over the U.S.
Details include a 15% import tariff on Japanese goods and various other remedies on behalf of Japan to help boost imports from the U.S.
But for Euro exchange rates, the details don't matter; what matters is that the Japan deal outlines the framework for the final outstanding deals, most notably that with the EU.
"For global markets, the trade deal news has been the most significant, as it’s raised hopes that the U.S. might be about to reach deals with other countries that avoid the higher tariffs on August 1," says Henry Allen, an analyst at Deutsche Bank.
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The Euro to Dollar exchange rate (EUR/USD) has risen 13.24% in 2025, helped by Trump's rearranging of global trade and domestic policies, which prompted investors to rebalance portfolios and hedge against further Dollar weakness.
The Euro has proven a major beneficiary of this hedging action, while its sizeable liquidity and deep fixed income markets make it a credible reserve currency at a time when the Dollar's status is being questioned.
It's too soon to call an end to the Euro's 2025 rally, but there is a growing sense amongst analysts that EUR/USD is entering a spell of consolidation.
"EUR/USD remains overbought and our tactical preference remains bearish," says Francesco Pesole, FX Strategist at ING Bank.
Above: EUR/USD at 15-minute intervals.
An U.S.-EU trade deal is still proving elusive and could yet upset markets. Ironically, the playbook says that a failure by the U.S. and EU to reach a deal would actually benefit the Euro.
Trump's first spell as president also saw tense negotiations between the two sides over trade, yet accords were always reached. The Administration's signalling and behaviour suggest this time won't be different, meaning the Euro really is running out of trade war fumes to keep its rally burning.
It will require other drivers to kick in and propel it to the 1.20 level that many institutional analysts are targeting in their forecasts.
Such drivers could be a pause to the European Central Bank's (ECB) interest rate cutting cycle, which should become apparent in Thursday's ECB policy meeting guidance.
If the ECB halts its rate cutting cycle, and the U.S. Federal Reserve delivers more cuts, then the interest rate channel would evolve in a supportive fashion for further Euro gains against the Dollar.
"I am confident the pair will head towards 1.20 later this year, suspect the peak will be around 1.25, in line with the 2018 and 2021 peaks, and I doubt we will see 1.30 for the foreseeable future," says Kit Juckes, FX Strategist at Société Générale.
