Can an ECB’s Dovish Rate Cut Counter Tariff Trade and Send EUR/USD to 1.05?
The tariff trade has sent EUR/USD surging above 1.08 and it’s unlikely that a dovish ECB cut could send it down to 1.05, but let’s see.
EUR/USD Surges as Tariff Delay Boosts Risk Sentiment
The U.S. dollar’s decline accelerated on yesterday, driven by optimism that the White House might postpone some scheduled tariffs. This shift in sentiment helped EUR/USD rebound from near-parity, leading to a strong rally in the euro. Over the past week, the euro has been the strongest-performing major currency, gaining four cents and reaching a four-month high above 1.08. This marked the first time since November that EUR/USD broke above all key daily moving averages, signaling a potential shift in market momentum.
ECB Rate Cut Expected, But Tariff Uncertainty Takes Center Stage
Markets are now focused on the European Central Bank’s (ECB) interest rate decision and Christine Lagarde’s press conference today. The ECB is widely expected to cut rates by another 25 basis points, lowering the deposit facility rate to 2.5%. This follows a full percentage point reduction last year and an additional 0.25% cut in January as policymakers prioritize economic concerns over stubborn inflation.
In normal conditions, such a move would likely drive EUR/USD lower, as a more dovish outlook typically weakens a currency. However, global political developments are overshadowing monetary policy, making today’s ECB decision less influential than usual.
Tariffs and Political Uncertainty Weigh on Eurozone Outlook
The rate decision comes at a critical time, as the U.S. was set to impose 25% tariffs on Canada and Mexico, alongside an additional 10% levy on Chinese imports, effectively raising duties to 20%. These tariffs would have been a major blow to the European economy, which is highly exposed to global trade.
Additionally, concerns are growing over potential 25% tariffs on EU imports, raising fears of a further slowdown after the eurozone economy stagnated in Q4 2024. While tariffs have been temporarily postponed, the U.S. dollar has been declining, providing a short-term boost to EUR/USD and potentially undermining the ECB’s dovish rate cut.
German Political Developments Add to Euro’s Strength
On the political front, German CDU leader Friedrich Merz has proposed a €500 billion public works investment plan over ten years as part of coalition negotiations. Initially, Merz campaigned on fiscal restraint, but his willingness to increase borrowing for defense spending helped secure a deal with the SPD. However, discussions over welfare spending offsets remain unresolved, meaning the plan is not yet guaranteed.
Despite ongoing uncertainties, the prospect of massive public investment in Germany is boosting market confidence in the euro. Combined with tariff delays and a weakening USD, these factors are helping EUR/USD hold its gains—even as the ECB moves forward with a dovish policy stance.
Market Outlook
While the ECB’s rate cut is expected to shape longer-term euro sentiment, immediate market direction will likely be driven by U.S. trade policy and political developments. If the tariff delay becomes permanent, EUR/USD could push higher. However, if trade tensions resurface, the euro may struggle to sustain recent gains, especially if economic weakness forces further ECB rate cuts in the coming months.
EUR/USD Live Chart
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