Euro in a volatile sideways phase

USD – Euro shrugs off US tariff threats

When US President Donald Trump raised the possibility of a 25% tariff on imports from the eurozone at the end of February and the euro responded by depreciating by less than half a percentage point against the US dollar, it seems a legitimate conclusion that the US president's favourite word has lost some of its power and terror. In the last quarter of 2024, the single currency fell by 8% against the US dollar when the mere idea of tariffs was still prevalent, and achieving parity was almost taken for granted. In fact, it seemed to be heading in that direction again at the beginning of February this year, when Trump specifically mentioned import tariffs from the European Union, but the currency was able to stabilise again immediately, even gaining almost 3% from its lows. Since there is little clarity regarding the extent and the schedule of possible tariffs, market participants are acting as if the Trump administration's massive tariff threats were merely tactical negotiating words. The uncertainty and confusion regarding the final type and amount of tariffs, as well as any countertrade, may even prove to be a slight tailwind for the euro, at least for the time being. We think that the euro will remain in a volatile sideways phase against the US dollar in the coming months.

Yen – Strengthening due to interest rate hike

As expected, the Bank of Japan (BoJ) raised interest rates at the end of January in response to strong economic data. The latest estimates for GDP growth and inflation were above market expectations. Comments from highranking representatives indicate that the BoJ expects further above-average growth in the coming quarters, leading us to expect further interest rate hikes in the coming months. However, erratic tariff decisions by Donald Trump against Japanese imports could cause the BoJ to pause its planned normalisation of monetary policy. Due to the expectation of further interest rate cuts by the ECB, we expect the yen to strengthen further in the coming months. 

CHF – SNB defends exchange rate

Despite four interest rate cuts by the Swiss National Bank (SNB) totalling 1.25% in this interest rate cut cycle, the CHF to euro exchange rate has been trading close to the 0.93 mark for months, which the SNB appears to be defending in order to avoid an excessive appreciation of the Swiss franc. The CHF strength is more due to the cyclical eurozone weakness and uncertainty than to Swiss economic strength. Since we expect more and larger interest rate cuts from the ECB than from the SNB, the interest rate differential for short maturities should also develop relatively positively for the CHF. We think that the CHF will continue to trend higher, but that the SNB will successfully defend the 0.93 level.

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