The Euro is recovering as the impact of a strong US Nonfarm Payrolls report fades. Concerns about US tariffs and the fiscal health of the country are putting pressure on the US Dollar. ECB President Lagarde and MPC member Villeroy have hinted at maintaining current interest rates in July. The EUR/USD pair is gaining strength, now trading in the high 1.1700s. The Dollar is giving back some of its gains after the NFP report due to worries about tariffs and comments from the European Central Bank, where officials are reinforcing a 2% inflation target.

Eurozone Economic Weakness

Market activity in the US is quiet because of the Independence Day holiday, with EUR/USD showing a modest weekly increase. Recent strong economic reports from the US have lowered expectations for a July rate cut by the Federal Reserve, now at 5%. Economic data indicates weaknesses in the Eurozone. The PPI is down, and German Factory Orders are also falling. French industrial output is decreasing, putting more pressure on the Euro amidst weak indicators. However, the Eurozone services sector showed slight growth in June. EUR/USD is having trouble staying above 1.1800, with possible bearish signals emerging. Despite recent highs, there are resistance levels at 1.1800 and beyond, with downside targets near 1.1710. Tariffs, unlike taxes, are charged on imports to protect local markets. Trump plans to apply tariffs to support US producers, focusing on major trading partners like Mexico, China, and Canada, and intends to use the tariff revenue to reduce income taxes. The market is starting to move past the immediate impact of the US employment surge, showing early signs that the Dollar’s rise is losing steam. The focus is shifting from strong hiring data to worries about sustainability, especially related to fiscal and trade issues. This indicates that the market is beginning to factor in broader risks beyond just labor statistics. Lagarde and Villeroy have recently emphasized that significant changes to monetary policy are unlikely this summer. While this doesn’t ensure a smooth path for the Euro, it removes one variable. With clarity on rate policy, attention will turn to the ongoing economic weakness in the Eurozone, which cannot be overlooked, especially with new data continuing to disappoint.

Implications of US Trade Policies

The PPI is declining, German Factory Orders are down again this month, and French production is also slipping. While this may seem routine, together these trends raise concerns for Q3 performance. The services sector is showing slow growth but not enough to counterbalance the issues in manufacturing. This creates a situation where even a slight improvement in US data could push EUR/USD lower. The recent rise in the Euro, nearing the high 1.1700s, is more of a temporary bounce than a trend change. The pair cannot maintain levels above 1.1800, which is important. Resistance is building at that level, likely intensified by options exposure and stop signals. On the downside, support around 1.1710 appears weak—closing below could lead to further downward movement if momentum shifts. Expectations for Federal Reserve rate cuts are becoming stable. A July rate cut now seems unlikely with chances at just 5%. This market positioning suggests that treasuries may remain stable as everyone waits for CPI or earnings to shift sentiment significantly. Therefore, the FX market may respond to sentiment rather than policy in the near term. Trade tensions are also impacting sentiment. With Trump pushing for new tariffs aimed at major economic players in the Eurozone, we adopt a cautious view. These tariffs are not traditional taxes; they target important supply routes under the pretense of protecting domestic industries. If implemented—or even come close to being passed—they could alter trade balances and currency flows. Safe havens and export-related currencies might react first. With lower trading volume due to the US holiday and European markets becoming more sensitive to upcoming data, it’s essential to monitor implied volatility closely. Pay attention to the spreads between front-end Eurodollar and Euribor contracts. While this won’t predict the direction, it will increasingly show where hedging pressures are building again. Create your live VT Markets account and start trading now.

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