EUR/USD Drops to Near 1.0860 as ECB Warns of Trade War Risks to Eurozone Growth

Traders' Opinions

Summary:

The EUR/USD pair dropped sharply to near the 1.0860 mark on Thursday, under pressure as ECB President Christine Lagarde highlighted the risks posed by potential U.S. tariffs on the Eurozone’s economic growth.

SELL EURUSD

Close Time

CLOSED

1.08400

Entry Price

1.06000

1.09500

1.17372 -0.00022 -0.02%

39.3

Pips

Profit

1.06000

1.08007

Exit Price

1.08400

Entry Price

1.09500

The euro is struggling against the U.S. dollar, with EUR/USD dipping to around 1.0860 during European trading hours on Thursday. The latest decline comes as European Central Bank (ECB) President Christine Lagarde warned that the Eurozone’s economic prospects could be severely dampened by escalating U.S. trade tensions, especially the threat of a trade war under President Donald Trump’s administration.

In a testimony before the Committee on Economic and Monetary Affairs of the European Parliament, Lagarde provided an in-depth analysis of the potential economic fallout from U.S. tariffs on European goods. She stressed that a 25% tariff on imports from Europe, as proposed by the U.S. administration, would result in a 0.3% slowdown in Eurozone growth within the first year. However, the economic impact could be even more pronounced if Europe retaliates with countermeasures, with the ECB projecting that the economic slowdown could deepen to 0.5%.

These concerns over slower growth are weighing heavily on the euro, as they suggest that the ECB may be forced to take further action to support the region’s economy. There is growing speculation that, in response to worsening economic conditions, the central bank could lower interest rates even further. However, the ECB’s outlook is not entirely bleak. Lagarde noted that Germany’s decision to abandon its decade-long policy of fiscal conservatism — in favor of increased government spending on domestic consumption and defense — could help counterbalance the negative effects of a trade war. This fiscal shift may provide some resilience against external economic shocks, but the uncertainty surrounding global trade dynamics continues to cloud the region’s growth prospects.

On the inflation front, Lagarde suggested that retaliatory tariffs from the European Union (EU) and a weaker euro could push inflation higher by approximately 0.5%. However, she emphasized that the inflationary impact would likely be temporary, with lower economic activity eventually easing these price pressures in the medium term. For now, the risk of prolonged weakness in the eurozone economy continues to hang over the euro, dampening investor appetite for the currency.

While the euro faces significant headwinds, the U.S. dollar is benefiting from a shift in investor sentiment. EUR/USD’s decline is being exacerbated by a strengthening U.S. dollar, as market participants digest a complex and uncertain economic outlook under President Trump’s leadership. The U.S. Dollar Index (DXY), which tracks the greenback against a basket of major currencies, rose to 103.65, signaling increasing demand for the dollar as a safe haven.

The U.S. Federal Reserve, in its policy statement on Wednesday, left interest rates unchanged, keeping the borrowing cost in the range of 4.25%-4.50%. This marks the second consecutive meeting in which the Fed has refrained from making any moves on rates. The central bank's decision was widely anticipated, and the Fed reaffirmed its commitment to cutting interest rates by two more times in 2025. However, the central bank remains cautious about acting too quickly, citing "unusually elevated" uncertainty regarding the future economic path under President Trump’s policies.

Fed Chair Jerome Powell underscored the risks associated with Trump’s trade policies, highlighting that tariffs tend to slow economic growth while driving up inflation. Despite the challenging economic backdrop, the Fed revised its core Personal Consumption Expenditures (PCE) price index forecast for 2025 upward to 2.8%, from 2.5%, reflecting concerns that inflation may not subside as expected. Furthermore, the central bank downgraded its 2025 GDP growth forecast to 1.7% from 2.1%, signaling a more cautious outlook for the U.S. economy.

In stark contrast to the Fed’s "wait and see" approach, President Trump has been vocal in urging the central bank to implement rate cuts more aggressively. In a post on Truth Social following the Fed’s policy announcement, Trump claimed that the Fed should cut rates immediately to offset the negative economic impact of tariffs, adding that doing so would be "the right thing" for the U.S. economy. Trump has long advocated for lower rates to spur growth, particularly in light of trade tensions that continue to weigh on the global economy.

Technical Analysis

From a technical perspective, the EUR/USD pair has recently broken out of a bearish rising wedge pattern, a technical formation that typically signals a reversal of the prevailing uptrend. As of March 20, 2025, the pair is trading around 1.0850, with a target of 1.0600 in the near term. The breakout is currently being tested, as the price retests the broken support level before continuing its downward trajectory. This retest phase provides traders with an opportunity to enter short positions, anticipating further declines.

Key support levels will be closely monitored during this phase, particularly around the 1.0767 mark, where previous buying interest has been observed. A strong rejection from this level would likely accelerate bearish momentum, confirming the breakout and driving EUR/USD lower. Traders should be on alert for further price action, as a sustained move below 1.0800 could pave the way for deeper losses, with the pair potentially targeting the 1.0600 level in the coming sessions

TRADE RECOMMENDATION

SELL EURUSD

ENTRY PRICE: 1.08400

STOP LOSS: 1.0950

TAKE PROFIT: 1.0600

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