The EUR/USD pair surged to near the 1.1100 level on Wednesday, gaining significant ground against the US Dollar (USD). This upward movement occurred as the USD came under pressure from escalating tensions in the trade war between the United States and China.
As the markets digested the news of China’s retaliatory tariffs, a potential shift in the Federal Reserve’s (Fed) monetary policy, and dovish expectations surrounding the European Central Bank (ECB), traders positioned themselves accordingly, driving the Euro (EUR) higher. The article includes a comprehensive assessment from the trading specialists at TelaraX.
China’s Retaliation Escalates Trade War Tensions
The main catalyst for the EUR/USD rally was the announcement from Beijing that it would increase tariffs on US imports to as much as 84%. This move came in response to the US President’s announcement of a hefty tariff hike on Chinese goods, which pushed tensions between the world’s two largest economies to new heights.
The tariff increase will take effect on April 10 and follows the US President’s decision to raise the import duties on Chinese goods to 104% after China had imposed a 34% tariff on US imports earlier in the week.
China, through a released White Paper, warned of its readiness to counteract these tariffs and safeguard its economic interests. The document underscored Beijing’s stance against “unilateral and bullying restrictive measures” and pledged to “resolutely counteract and fight to the end.”
As a result, investors have grown increasingly concerned that the ongoing trade conflict could drive the US economy into a recession, which has led to a sharp uptick in expectations that the Fed will resume its cycle of interest rate cuts.
The Fed’s Changing Policy Expectations
The intensification of the trade war between the US and China has brought renewed focus on the US Federal Reserve’s monetary policy. Market participants are now pricing in a higher probability that the Fed will cut interest rates sooner rather than later. According to the CME FedWatch tool, the probability of a rate cut in May has jumped to 52.5%, up from just 10.6% a week ago. Additionally, there is a growing expectation that the Fed will reduce rates further in June.
Minneapolis Fed President Neel Kashkari voiced concerns over the economic impact of the US President’s tariffs, warning that the policy would lead to near-term inflationary pressures, lower purchasing power, reduced investment, and a slowdown in GDP growth.
Given these uncertainties, traders are betting on the Fed shifting to a more dovish stance in upcoming meetings, adding further pressure on the USD and boosting the EUR/USD pair.
Economic Data and Market Movements
Ahead of Thursday’s release of the US Consumer Price Index (CPI) for March, market participants are closely watching the inflation data for further clues on the Fed’s future policy direction. Expectations are for the headline CPI to rise by 2.6%, with core CPI climbing 3%. Any deviation from these expectations could shift the market’s view on future interest rate cuts and impact the EUR/USD pair’s movements.
The EUR/USD pair, driven by these developments, strengthened significantly, rising to near the 1.1100 level during North American trading hours. As of Wednesday, the pair is eyeing a return to its six-month high of 1.1147.
The technical outlook remains bullish, with the 20-day Exponential Moving Average (EMA) acting as support around 1.0856. Furthermore, the 14-day Relative Strength Index (RSI) has bounced back above 60, indicating that bullish momentum is intact.
Technical Analysis: EUR/USD Trends Bullish
Technically, the EUR/USD pair is poised for further gains, with the pair advancing toward 1.1100. Should the pair breach this level, it will likely target the 1.1147 high, which marks the six-month peak.
On the downside, the March 31 high of 1.0850 will act as crucial support. A break below this level would signal a shift in momentum, but for now, the bullish bias remains intact.
The key resistance level for EUR/USD remains at 1.1214, the high from September 25. If the Euro bulls manage to clear this barrier, it could pave the way for further gains toward the next significant resistance levels.
Conclusion
The EUR/USD pair has surged as the US Dollar faces growing headwinds from the intensifying trade war between the US and China. The increased tariffs and the potential for a recession in the US have prompted traders to expect the Fed to cut interest rates sooner than previously anticipated.
Meanwhile, the ECB’s dovish stance adds complexity to the Euro’s strength. As market participants await key data and policy decisions, the EUR/USD pair is set to remain volatile, with the potential for further rallies or corrections depending on the evolution of these key events.
COMTEX_465096118/2922/2025-05-01T01:45:33
