Trump Signs Trade Tariffs into Action – What can we Expect for the EUR/USD Exchange Rate?
The Euro US Dollar (EUR/USD) exchange rate could encounter a great deal of volatility in the medium-term, depending on the global reaction to US President Donald Trump’s trade tariff measures.
The US President, (flanked by steel and aluminium workers) signed a proclamation on Friday levying a 25% tariff on steel, and a 10% tariff on aluminium – effectively calling China and the European Union’s bluff.
This will take some 15 days to come into effect.
These measures are intended to better protect the American worker and ultimately protect the US steel and aluminium industries, (one of his campaign promises) with the two metals being ‘the bedrock of our defence-industrial base’ according to the US President.
The international reaction was one of massive condemnation, however, with the EU threatening retaliatory measures in the form of substantial tariffs on American brands such as Harley-Davidson and Levi Strauss and Bejing insisting that it will move to protect its interests.
Nonetheless, analysts are beginning to ponder if the European Union will act as severely as it has postured, particularly with the bloc already having a sizable trade surplus with the United States.
In this respect, the EU could have a great deal more to lose in the event of a trade war with the US, a notion that President Trump has repeatedly, and confidently cited.
So what can we expect? International Monetary Fund Chief Christine Lagarde has warned that ‘nobody wins’ in a trade war, and markets generally dislike all forms of trade intervention.
Because of this, the market response is liable to be one of caution for both the Euro and the ‘Greenback’, with both currencies expected to drop in demand as investors flee to safer investments.
Long term, a de-escalation from the bloc or indeed China could limit these anxieties, however.
US Wage Growth Decelerates – US FOMC Rate Hike Prospects Fall, USD Exchange Rates Follow Suit
The outlook for the ‘Greenback’ was slightly hindered on Friday as markets responded to February’s labour market statistics, with a slight deceleration in wage growth for this period.
According to the US Bureau of Labour Statistics, average hourly earnings in America cooled to 2.6% in February (on a yearly basis), down from the previous period’s surge of 2.8%.
In slightly better news, however, the number of US payrolls leapt by a whopping 313,000 last month, exceeding Wall Street expectations of 200,000 and underlining the fact that the US employment sector is continuing to tighten.
Glassdoor Economist Andrew Chamberlain shared his optimism on the readings:
‘Today’s strong jobs report marks 89 consecutive months of positive job gains for the economy, an all-time record since the 1930’s. Our current economic expansion has not hit 104 months, which is the third-longest American expansion on record since the 1850’s’.
It should be stressed, however, that markets had been keeping a keen eye on US wage growth readings as they tend to act as a precursor to inflation.
In this respect, wage growth cooling could bode poorly for the US Federal Reserve’s rate hike prospects this month, with the potential for 4 rate hikes this year, rather than 3, threatened by this move.
Notable Domestic Data Releases on the Horizon for the EUR/USD Exchange Rate – US and EU Inflation in the Spotlight
Next week will feature the CPI inflation releases for both the US (due Tuesday) and the bloc (due Friday), with markets expected to focus heavily on the US readings.
As previously touched upon, analysts are currently anticipating a rate hike from the US Federal Reserve at the end of this month, though this prospect could be scuppered if the US inflation readings print significantly below expectations.
Beyond this, markets will continue to keep an eye on the world’s response to Trump’s tariff measures, with any indication of retaliation liable to increase market risk aversion and cause volatility for EUR/USD.