EUR/USD finds cushion around 1.0780 and rises to near 1.0825 during North American trading hours on Tuesday. The major currency pair attracts bids as the US Dollar (USD) drops on the narrower-than-feared tariff agenda of United States (US) President Donald Trump. The US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, falls to near 104.00 from an over two-week high of 104.50.
US President Trump signaled to reporters at the White House on Monday that not all tariffs will be implemented on April 2. Trump said that some countries could get exempted from additional import duties. Market participants have taken Trump's comments as positive for risky assets, expecting that the impact of a limited trade war would be lower globally than initially feared. Trump also reiterated that he will announce tariffs on automobiles, aluminum and pharmaceuticals soon.
On Monday, the US Dollar strengthened after the release of the upbeat preliminary S&P Global Services Purchasing Managers Index (PMI) data for March. The agency reported that robust services sector activity offset the impact of an unexpected decline in the manufacturing sector and resulted in a sharp increase in the Composite PMI. The Services PMI rose to 54.3, significantly higher than the 51.0 recorded in February. Economists expected a mild increase in the service sector activity to 51.2. The services sector is the backbone of the US economy, given that it accounts for roughly two-thirds of the economy.
Meanwhile, accelerating consumer inflation expectations due to Trump's trade policies have also strengthened the US Dollar. On Monday, Atlanta Fed Bank President Raphael Bostic said in an interview with Bloomberg that he expects "only one interest rate cut this year" as he sees a slowdown in the progress in the disinflation trend towards the 2% target, assuming that businesses will bear the burden of tariffs. Collectively, Federal Reserve (Fed) officials see two interest rate cuts this year, as shown by the dot plot in the Summary of Economic Projections of the March policy meeting.
EUR/USD rises even though the Euro (EUR) trades cautiously across the board on expectations that the European Central Bank (ECB) could reduce interest rates again in April. The ECB has cut its key borrowing rates six times since June and expects to win the battle against inflation this year.
Last week, ECB President Christine Lagarde said while testifying before the European Parliament Committee that the inflationary impact of the Trump-led trade war is temporary as the effect would "ease in the medium term" due to "lower economic activity dampening inflationary pressures".
Lately, traders have pared ECB dovish bets on expectations that the tariff war between the US and the Eurozone could lead to an increase in inflationary pressures in the old continent for a longer period.
On the economic front, German IFO Business Climate data for March, an early indicator of current conditions and business expectations, has come in higher at 86.7 from the prior reading of 85.3 but missed estimates of 86.8. The Expectations component – which presents outlook for the next six months – increased to 87.7 from the prior release of 85.6. It also missed the expectations of 87.9. IFO Current Assessment data came in at 85.7, beating estimates of 85.5 and the former reading of 85.0.
Source: Fxstreet
