Euro traders on edge: Impact of US tariff threats on EUR/USD trades

For Euro traders, especially those dealing in EUR/USD, recent comments from German Chancellor Merz and the ongoing tariff standoff with the U.S. are crucial. Here’s a straightforward look at why it matters:

1. The Euro Feels the Tariff Pain

Chancellor Merz has warned that a potential 30% U.S. tariff would severely impact German industry, potentially slowing down the entire Eurozone’s growth1. This risk has already caused European stocks to dip and pushed the Euro to three-week lows against the dollar, around 1.1676 USD2. While the EUR/USD pair recovered slightly to about 1.1700 as market optimism returned, the initial drop shows the Euro’s vulnerability3.

2. The Dollar’s “Safe Place” Appeal

When trade tensions rise, the U.S. dollar often becomes a “safe haven” for investors looking for stability. Even small movements reflect this trend. If these tariffs actually go through, the outlook for Europe’s economy and the Euro becomes more negative. Traders might then move their money into the U.S. dollar, putting more pressure on the EUR/USD, unless the European Central Bank (ECB) does something to counter it.

3. Hope for a Deal Can Boost the Euro

On the brighter side, Merz remains cautiously optimistic that a deal can be reached by the end of July4. Such positive signals help prevent the EUR/USD from falling even further, as markets start to price in the possibility of a trade agreement.

4. Central Banks Taking Different Paths

If the Eurozone economy slows down due to tariffs, it could push the ECB to delay raising interest rates, or even suggest they might lower them (a “dovish” stance). Meanwhile, if the U.S. economy faces growing recession risks from tariffs, or if the Federal Reserve (Fed) delays cutting rates, the U.S. dollar could strengthen. This difference in central bank policies (one potentially pausing or easing, the other holding firm) would make the U.S. dollar stronger and could further push EUR/USD lower.

5. How to Approach Your Trades

Here’s a quick guide on what to expect for EUR/USD in different scenarios:

• Tariffs Go Live: Expect EUR/USD to drop, potentially into the 1.1500–1.1600 range.

• Deal is Reached: Expect EUR/USD to rebound, possibly towards 1.1800–1.1900.

• Talks Drag On with Fed Hikes: The pair might trade within a tighter range, perhaps 1.1650–1.1750.

• ECB Eases While Fed Holds: The U.S. dollar would likely perform better, pushing EUR/USD lower. There is even an interesting key price level at apx 1.07 that I am looking at, in such a scenario

For short-term trades, consider selling EUR/USD when there are headlines about tariffs, especially if U.S. interest rates (yields) are also rising. For event-driven trades, keep a close eye on key dates: the August 1st tariff effective date, upcoming ECB and Fed meetings, and U.S. inflation reports. If you have long (buy) positions in Euro, consider using options to protect against sudden price swings.

So, Merz’s warnings highlight a real risk for the Euro, driven by potential economic slowdown and differing central bank policies. Until a trade solution is found, EUR/USD remains vulnerable, especially if tensions escalate. However, any hint of a deal could cause a quick rebound. Traders should closely watch U.S. tariff decisions, EU negotiation updates, and central bank reactions to guide their trading strategies.