The EUR/USD currency pair has fallen to approximately 1.0830 as European Central Bank (ECB) President Christine Lagarde expressed concerns that a potential trade war led by US President Trump could negatively impact Eurozone economic growth. The Federal Reserve (Fed) maintained its current borrowing rates and reaffirmed its forecast of two interest rate cuts in 2025 during their recent meeting on Wednesday. This reflects the Fed's belief that Trump's policies might hinder US economic progress while simultaneously contributing to rising price pressures.
During the North American trading hours on Thursday, the US Dollar (USD) witnessed a significant strength boost, pushing the US Dollar Index (DXY) close to 104.00. The major currency pair's decline can be attributed to the Fed's cautious stance on monetary policy adjustments amid "unusually elevated" uncertainty surrounding Trump's policies. The Fed left key borrowing rates unchanged in the range of 4.25%-4.50%, as anticipated, with Fed Chair Jerome Powell stating, "We are not going to be in any hurry to move on rate cuts."
Despite the Fed's "wait and see approach," President Trump has been vocal about his belief that the central bank should lower interest rates. He contended that the effects of tariffs are starting to influence the economy. In a post on Truth Social after the Fed’s decision, Trump remarked, "The Fed would be much better off cutting rates as US tariffs start to transition (ease!) their way into the economy. Do the right thing." The central bank has adjusted its forecast for the core Personal Consumption Expenditures Price Index (PCE) to 2.8% for this year, up from the previously projected 2.5%, while also lowering GDP growth expectations to 1.7% from 2.1%.
On the economic data front, initial jobless claims for the week ending March 14 came in nearly in line with estimates, remaining steady at 223K. This stability in jobless claims reflects ongoing labor market resilience, despite broader economic uncertainties.
The EUR/USD pair has seen a sharp decline as the Euro (EUR) faces mounting pressure following Lagarde's warnings about potential economic shocks in the Eurozone. Lagarde testified before the European Parliament's Committee on Economic and Monetary Affairs, highlighting that proposed US tariffs of 25% on European imports could reduce "Euro area growth by about 0.3% in the first year," according to ECB analysis. Moreover, retaliatory measures from Europe could exacerbate the situation, potentially increasing the growth slowdown to 0.5%.
The looming threat of soft Eurozone economic growth is likely to diminish the appeal of the Euro, compelling the ECB to consider further interest rate reductions. However, Germany's recent shift away from over a decade of fiscal conservatism aims to stimulate domestic consumption and defense spending, potentially mitigating the adverse effects of the trade war. Lagarde also projected that any retaliatory tariffs and a weaker Euro exchange rate could elevate inflation by around 0.5%, but she anticipates this effect to be temporary, as lower economic activity may dampen inflationary pressures in the medium term.
As the EUR/USD pair falls to near 1.0830, it failed to maintain the critical level of 1.0900. Nevertheless, the long-term outlook for this major currency pair remains bullish, as it continues to trade above the 200-day Exponential Moving Average (EMA) situated around 1.0660. Following a decisive breakout above the December 6 high of 1.0630 on March 5, the pair is showing strength. The 14-day Relative Strength Index (RSI) has cooled down after reaching overbought conditions around 75.00, indicating that while the bullish momentum may have moderated, the upside bias persists. The December 6 high of 1.0630 will serve as a crucial support zone, while the psychological barrier of 1.1000 remains a key resistance level for Euro bulls.
