EUR/USD Soars on Trade Tensions

The euro has struck a 3-month high versus the US dollar in foreign exchange markets, with EUR/USD breaking back over 1.07 as of Wednesday morning, 5 March. 

The escalating trade war initiated by President Donald Trump’s new tariffs against Canada, Mexico and China has contributed to a sharp decline in the US dollar, which fell versus most major currencies, including the Canadian dollar and Mexican peso.

EUR/USD Price Performance Chart

The EUR/USD forex pair broke out of a base with a ceiling defined by a shallow downtrend line (blue) on Tuesday, 4 March, and added to its gains early Wednesday. 

Technical analysts might describe the price action as the completion of an inverse head-and-shoulders pattern. The pattern consists of a price forming a low, then a lower low, then a higher low, with the interceding highs connected by a ‘neckline’—the blue trendline in this case. The completion of the pattern is considered a bullish development. (Source: Investopedia)

*Past performance does not indicate future results 

Why Is the EUR/USD Moving Higher?

Trade War & Tariffs

Uncertainty around the implications of tariffs appears to be the biggest driver of sentiment in the forex market. On Tuesday, US tariffs on imports from Canada, Mexico, and China went into effect—the same day President Donald Trump delivered his State of the Union address, where he highlighted his administration's achievements over the past six weeks. 

Canada and China promptly launched retaliatory measures, while Mexican President Claudia Sheinbaum pledged to respond in kind, with more specifics coming today (Wednesday).

German Fiscal ‘Bazooka’

This week German political parties agreed to establish a 500 billion-euro ($529 billion) infrastructure fund and, notably, revised borrowing limits in what economists have described as “a really big bazooka.”

In the same way that defense spending could spur the German economy, so too could spending on infrastructure. As Europe’s largest economy, German economic performance tends to have an outsized effect on the eurozone.

European Defense Spending

The euro has benefited from the dollar’s near-term weakness, perhaps in part due to European nations' commitment to spending more on defense, particularly to protect Ukraine. Significant defense spending could boost the ailing European economy and support the euro.

European Commission President Ursula von der Leyen announced Tuesday that new defense spending measures proposed by the European Union could potentially free up as much as 800 billion euros ($841 billion).

Stock Market Correction

A 25% tariff on major trading partners could likely be highly disruptive, and trade wars have historically spelled trouble for equities. As a result, investors could adopt more defensive strategies, including less aggressive stock market manoeuvres and a preference for haven currencies like the Japanese yen and Swiss franc over the US dollar.

Conclusion

The euro’s recent gains stem from a combination of US dollar weakness and Europe’s fiscal and defense initiatives. Escalating trade tensions continue to drive uncertainty in global currency markets.  

Looking ahead, additional policy measures and economic shifts will likely determine the longer-term direction of EUR/USD. 

Only time will tell what lies ahead.

*Past performance does not indicate future results