European Union fires back, euro gains ground

The euro has gained ground on Tuesday.  In the North American session, EUR/USD is trading at 1.0485, up 0.18%. On Monday, the euro climbed as high as 1.0527, its highest level this year.

EU says will retaliate if US imposes tariffs

US President Donald Trump tariff threat has many countries up in arms, including staunch allies of the US.  The European Union has announced that if the US goes ahead with tariffs on European steel and aluminum, it will retaliate.  The US tariffs could take effect as early as March 12 and the EU countermeasures would kick in at the end of March.

The US and the EU were involved in a trade war during Trump’s first term in 2018 but reached a truce in 2021 under President Biden.  Another trade war will be harmful to both sides and would likely raise inflation in both the EU and the US, a specter that the ECB and Federal Reserve hope can be avoided.

Germany’s economy declined by 0.2% q/q in the fourth quarter of 2024, confirming the initial estimate.  This follows the Q3 gain of 0.1% and matched the market estimate. Annualized, GDP contracted 0.2% in the fourth quarter, confirming the initial estimate and following a 0.3% contraction in Q3.  This marked a sixth straight quarter of negative growth in the eurozone’s largest economy.

Eurozone inflation for January climbed 2.5% y/y, unchanged from the initial estimate.  This marked the highest rate since July 2024, largely driven by a sharp jump in energy costs.  The inflation report indicates that inflationary risks to the upside remain, which could complicate the ECB’s plans to reduce interest rates and kick-start the weak eurozone economy.  The ECB lowered rates last month and meets next on March 6.

 EUR/USD Technical

• EUR/USD is testing resistance at 1.0483.  Above, there is resistance at 1.0513
• 1.0438 and 1.0408 are the next support lines

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