Why US-EU Trade Spats Are Boosting the Euro

While betting markets signal a near-certain Democratic takeover of the House of Representatives this November, President Donald Trump's core policy agenda is likely to remain insulated from congressional gridlock.

According to analysis from Paul Ashworth, Chief North America Economist at Capital Economics, Trump’s reliance on executive action for his signature initiatives means a shift in House control would do little to slow him down. For traders and policy watchers, the real story isn't who wins the House, but how little it may matter for immigration, trade, and foreign policy.

The Limits of Legislative Power

President Trump has consistently favored executive orders over congressional legislation to advance his most significant policies. Because this strategy bypasses the legislative branch, a Democratic-controlled House would have limited tools to block or reverse these actions.

While Democrats could launch investigations and even initiate impeachment proceedings, a conviction would be practically impossible without control of the Senate. This leaves Trump with what Ashworth describes as "free rein" to pursue his primary objectives.

A Look at the Midterm Election Math

The current political landscape shows just how narrow the margins are and why control of both chambers is crucial for any real shift in power.

The House: A Likely Democratic Flip

Republicans currently hold a razor-thin 218–213 majority. With the president’s approval ratings weakening, the political climate appears favorable for a change.

• All 435 seats are up for election on November 3.

• Betting markets are pricing in a nearly 80% probability that Democrats will regain control of the chamber.

• Several special elections in the coming months will provide an early look at potential voter shifts.

The Senate: A Tougher Battle for Democrats

Securing the Senate is a much heavier lift for the Democrats, making it the key firewall for the Trump administration.

• Republicans hold a 53–47 majority.

• Only 35 seats are being contested this cycle.

• To gain a majority, Democrats need a net pickup of four seats. A 50-50 tie would be broken by Vice President Vance's casting vote.

• Betting markets currently place the odds of a Democratic Senate flip at only 35%.

Even in the unlikely scenario where Democrats win both the House and Senate, they would fall far short of the 60 votes needed to overcome a filibuster or the two-thirds majority required to override a presidential veto. These structural barriers ensure the president’s agenda remains largely intact.

Pre-Election Risks and Market Jitters

As the midterms approach, two key risks could emerge: a last-ditch effort at fiscal stimulus and challenges to the electoral process itself.

Will Fiscal Stimulus Save the GOP?

While a pre-election stimulus package might seem like a logical move to boost voter support, Ashworth is skeptical. The federal budget deficit is already hovering around 6% of GDP.

This could worsen significantly if IEEPA-related tariffs are ruled illegal, which would force the Treasury to refund over $100 billion. Given these fiscal pressures, Republican deficit hawks are unlikely to support another round of stimulus checks.

The Specter of an Election Challenge

More unconventional risks revolve around the integrity of the election itself. Ashworth notes the possibility that President Trump could intervene or challenge the results, citing claims of Democratic "rigging" or civil unrest.

Although constitutional protections are expected to hold, such a move could create significant uncertainty and be "poorly received by financial markets." Furthermore, even after the votes are counted, Trump could contest the outcome during the lame-duck session if Republicans lose seats, as the next Congress is not scheduled to convene until January 2027.

The USD/CAD exchange rate has dropped to its lowest point since January 5, driven by a retreat in the U.S. dollar index. The pair has fallen for five straight days, marking its longest losing streak since May 2025.

However, new political risks are emerging, with central bank decisions from both Canada and the United States set to define the pair's next move this week.

Trump Threatens 100% Tariff on Canadian Goods

A significant new factor for the Canadian dollar is a threat from Donald Trump to impose a 100% tariff on all Canadian exports to the United States. This includes goods covered under the USMCA trade agreement he previously negotiated.

The threat stems from two main issues:

• Canada-China Trade Deal: Trump expressed anger over a new trade agreement between Canada and China that lowers tariffs on Chinese electric vehicles to 6%. In return, China lifted its tariffs on Canadian canola.

• Mark Carney's WEF Speech: He was also disappointed by a speech from Mark Carney at the World Economic Forum. Carney criticized the power games of the world's largest economies and called for middle-power countries to unite in response.

This statement was widely interpreted as being aimed at Trump, who had recently made threats concerning Greenland, a semi-autonomous island linked to Denmark. A 100% tariff would have a major impact, as Canada is the largest trading partner of the U.S., with billions of dollars in goods flowing between the two countries annually.

Still, some market observers remain skeptical, pointing to Trump's reputation for backing down from major threats, sometimes referred to as TACO ("Trump Always Chickens Out"). This was seen last week in the Greenland issue, where an initial aggressive stance ended with a deal that introduced no significant changes.

Central Banks Poised to Hold Interest Rates

The monetary policy outlook will be the other critical driver for USD/CAD this week, with both the Bank of Canada (BoC) and the U.S. Federal Reserve scheduled to announce rate decisions.

Bank of Canada Decision on Thursday

Economists broadly expect the Bank of Canada to hold its key interest rate steady at 2.25%. This would give policymakers more time to assess incoming macroeconomic data, which has recently sent conflicting signals.

While Canada's labor market slowed in December after three consecutive months of growth, an inflation report last week showed that consumer prices rose more than anticipated.

Most analysts forecast that the BoC will maintain its current rate for the rest of the year. One analyst told Reuters, "At this point, the BoC is ready to take a fairly long wait-and-see stance. If there's a risk of a move, it's more likely to be a cut than a hike this year."

Federal Reserve Decision on Wednesday

Similarly, the Federal Reserve is expected to leave its benchmark interest rate unchanged in the current range of 3.50% to 3.75%.

Recent economic data from the U.S. has been encouraging. A report last week showed that the U.S. GDP grew by 4.4% in the third quarter, surpassing the median forecast of 4.3%. Furthermore, the labor market has shown signs of improvement in recent months, although inflation remains somewhat constrained.

USD/CAD Technical Analysis: A Bearish Outlook

Figure 1: The daily chart for USD/CAD shows a clear bearish trend, with the price falling below the 50-day and 100-day Exponential Moving Averages (EMAs). Momentum indicators like the RSI and PPO support a continued move lower.

The daily chart shows that the USD/CAD has been in a strong downtrend, falling from a high of 1.3925 on January 16 to its current level around 1.3700.

Several technical indicators point to continued weakness:

• The pair is trading below both the 50-day and 100-day Exponential Moving Averages (EMA), a classic signal that sellers are in control.

• The Relative Strength Index (RSI) and the Percentage Price Oscillator (PPO) are both pointing downwards, indicating bearish momentum.

Based on this technical picture, the forecast for USD/CAD remains bearish. The next key support level to watch is 1.3640.

The European Union and Vietnam are set to elevate their relationship during a visit to Hanoi on Thursday by European Council President Antonio Costa. An EU official confirmed the move, which comes as both sides look to strengthen international partnerships in an era of trade disruption driven by U.S. tariffs.

The visit is timed shortly after To Lam was re-appointed as Vietnam's top official. The meeting could make Costa the first leader of a major global power to meet Lam since the ruling Communist Party confirmed him for a new term as general secretary on Friday.

According to the official, who spoke on the condition of anonymity, the diplomatic upgrade has been planned for months but was delayed due to scheduling issues.

A Symbolic Upgrade in a Shifting Landscape

This move will place the European Union in Vietnam's highest tier of diplomatic partners, alongside nations like China, the U.S., and Russia. It aligns with Vietnam's long-standing strategy of balancing its relationships with major world powers.

While largely symbolic, these upgrades typically signal more frequent high-level meetings between officials, though they do not usually involve new binding agreements. The European Council declined to comment on the matter, and Vietnam's government did not respond to a request for comment.

The push for stronger ties comes as Vietnam navigates complex international relations. Despite upgrading bilateral ties with the U.S. during a late 2023 visit by former president Joe Biden, Vietnam's relationship with Washington worsened last year following tariffs imposed by the Trump administration.

Deeper Cooperation on Tech and Minerals

The enhanced partnership with the EU is expected to pave the way for greater cooperation across several key sectors. A draft joint statement indicates a focus on research, technology, energy, and critical minerals. Vietnam holds significant, though often underdeveloped, deposits of rare earths, gallium, and tungsten.

As a trade-reliant nation, Vietnam is a critical node in global supply chains, particularly for electronics, clothing, and footwear. The country has proactively signed numerous free trade agreements, including a major deal with the European Union.

Persistent Trade Imbalances Create Friction

However, the EU-Vietnam free trade agreement (FTA) has been a source of tension. Since it took effect in 2020, the deal has amplified Vietnam's trade surplus with the 27-nation bloc. In 2024, the EU's trade deficit with Hanoi reached €42.5 billion ($50.26 billion).

EU officials have repeatedly criticized Vietnam's implementation of the agreement, accusing Hanoi of using various non-tariff barriers to obstruct imports from the EU. To date, Brussels has taken limited action to resolve these issues.

For its part, the EU is also facing pressure from U.S. tariffs and has prioritized shoring up ties with economic partners worldwide. This includes recent efforts to advance trade agreements with South American nations in the Mercosur bloc.

Before his trip to Vietnam, Costa is scheduled to visit India. According to the EU Council, he and European Commission President Ursula von der Leyen plan to hold trade negotiations with Indian Prime Minister Narendra Modi.

The United States captured former Venezuelan President Nicolás Maduro in January 2026, a geopolitical development immediately followed by an oil transfer agreement announced by President Donald Trump. This event is set to create significant ripples in global energy markets, influencing both short-term volatility and long-term price trends.

The Deal: 30-50 Million Barrels for the US

Following Maduro's capture, the Trump administration quickly secured an agreement with Venezuela's interim leadership. Acting Vice President Deli Rodriguez confirmed that the nation would hand over between 30 and 50 million barrels of oil to the United States at no cost.

President Donald Trump stated, "Venezuela's interim authorities agreed to provide the U.S. with 30-50 million barrels of oil immediately."

The move highlights a direct link between U.S. foreign policy and its energy strategy, targeting Venezuela's vast oil reserves, which have been notoriously mismanaged.

Market Reaction: Oil Stocks Jump on Uncertainty

The initial market response was swift. Major traditional oil stocks, including Chevron and Exxon, climbed 2% on the news. Investors appear to be pricing in the potential for short-term oil price hikes driven by leadership uncertainty in the oil-rich nation.

However, the cryptocurrency sector remained unaffected. There were no discernible changes in crypto markets, likely because long-standing sanctions have already isolated Venezuela from global financial systems and limited its links to the digital asset industry.

Long-Term Outlook: Can Venezuelan Oil Lower Prices?

While immediate uncertainty may push prices up, the long-term outlook could be the opposite. The capture of Maduro echoes past U.S. actions against oil-producing regimes, which often aim to reshape global supply dynamics. Decades of sanctions and mismanagement under previous administrations led to a severe decline in Venezuela's oil infrastructure.

According to one petroleum analyst, the new arrangement could ultimately lower global oil prices if Venezuelan production is restored. The success of this scenario hinges entirely on whether the U.S. can effectively help revamp the country's crumbling infrastructure to boost output.

"Maduro's arrest could possibly raise oil prices slightly due to uncertainty around Venezuela's leadership structure," the analyst noted. But, they added, "potential increased output from Venezuela could drop global crude oil prices long-term, especially if the US is successful in raising investment in Venezuela's crumbling infrastructure."

The Bank of Japan is holding its key interest rate steady at 0.75%, a closely watched decision driven by signs that inflation is beginning to moderate. The move, which signals a pause after a rate hike last year, has immediate implications for the yen and could influence global financial markets through the popular carry trade.

The Rate Decision: An 8-1 Split

The BOJ's Policy Board voted 8-1 to maintain the current interest rate. The decision was not unanimous, highlighting a division among policymakers on the best path forward for Japan's economy.

Board member Hajime Takata was the sole dissenter, casting a vote in favor of a 25 basis point hike. The central bank's decision was made independently, without direct influence from Prime Minister Sanae Takaichi.

Market Reaction and the Yen Carry Trade

Immediately following the announcement, the yen weakened as bond markets reacted. The yield on the ten-year Japanese Government Bond (JGB) now stands at 2.25%, reflecting the market's response to the continued low-rate environment.

This decision has significant implications for the yen carry trade, a strategy where investors borrow in a low-interest-rate currency (like the yen) to invest in assets denominated in a higher-interest-rate currency. The persistence of low rates in Japan could keep this trade attractive, affecting asset prices globally. Historically, shifts in the carry trade have been known to exert pressure on international financial assets.

Economic Outlook and Policy Goals

Alongside the rate decision, the Bank of Japan updated its economic projections. The central bank now forecasts GDP growth to be between 0.8% and 1.0% by fiscal year 2026. This outlook assumes that inflation will continue to moderate, supported by government fiscal measures aimed at boosting private consumption.

The BOJ's overarching policy is to strike a balance between stable economic activity and price stability, with a long-term inflation target of 2% for the Consumer Price Index (CPI).

Navigating High Debt and External Risks

While the policy aims for stability, it operates against a backdrop of significant risk. Japan's national debt remains a major concern, standing at 240% of its GDP. Furthermore, any financial maneuvers related to the yen could have ripple effects on external markets. The BOJ's current stance suggests it expects inflation to stabilize, allowing the economy to navigate these challenges.

Top U.S. envoys met with Israeli Prime Minister Benjamin Netanyahu on Saturday, urging his government to move forward with the second phase of the Gaza ceasefire agreement. The diplomatic push comes as the deal faces significant hurdles, including the return of a hostage's remains and the reopening of a critical border crossing.

Netanyahu met with U.S. President Donald Trump's envoy Steve Witkoff and son-in-law Jared Kushner. According to a U.S. official, the talks focused on recovering the last hostage's remains from Gaza and outlining the next steps for the territory's demilitarization. While the U.S. is keen to maintain momentum on the Trump-brokered deal, Netanyahu is under domestic pressure to delay progress until Hamas returns the hostage.

Palestinians receive donated food at a community kitchen in Nuseirat, central Gaza, illustrating the humanitarian crisis underlying the ceasefire negotiations.

Hostage Remains and Rafah Crossing Stall Progress

The most critical signal of the ceasefire's second phase would be the reopening of the Rafah border crossing between Gaza and Egypt. Ali Shaath, head of a planned technocratic government intended to manage Gaza's daily affairs, stated on Thursday that the crossing would open in both directions this week. However, Israel, which currently controls the Gaza side of the crossing, has not confirmed this and said it would review the issue.

The situation is complicated by the case of Ran Gvili, whose body remains in Gaza. His family is urging for increased pressure on Hamas. "President Trump himself stated this week in Davos that Hamas knows exactly where our son is being held," the family said Saturday, accusing the group of violating the agreement.

Hamas countered on Wednesday, claiming it had provided mediators with "all information" it possesses about Gvili's remains and accused Israel of obstructing search operations in areas it controls. The ceasefire originally took effect on October 10.

Regional Diplomacy Intensifies

Egypt's top diplomat is also pushing for an immediate reopening of the Rafah crossing. Foreign Minister Bader Abdelatty spoke by phone with Nickolay Mladenov, the Bulgarian diplomat serving as the high representative for Trump's new Board of Peace in Gaza.

According to a statement from the Egyptian Foreign Ministry, their discussion covered several key elements of the ceasefire's second phase:

• Deployment of an international monitoring force.

• Opening the Rafah crossing for entry and exit.

• Withdrawal of Israeli forces from the strip.

The ministry described the implementation of this phase as a "key entry point" for Gaza's reconstruction. Meanwhile, a Hamas delegation met with the head of Turkey's National Intelligence Organization in Istanbul to discuss the ceasefire.

U.S. President Donald Trump displays a signed charter at the Board of Peace meeting during the World Economic Forum in Davos.

Violence Persists on the Ground

Despite the diplomatic efforts, tensions remain high. On Saturday, an Israeli strike killed two Palestinian teenagers, cousins aged 13 and 15, in Gaza. According to Shifa Hospital in Gaza City, which received the bodies, the boys were searching for firewood at the time.

A relative, Arafat al-Zawara, said the teens were killed about 500 meters from the Yellow Line, which separates Israeli-controlled areas from the rest of the strip, in a zone the Israeli military had previously declared safe for Palestinians.

The Israeli military stated it had targeted militants who crossed the Yellow Line to plant explosives, denying that children were killed in the strike.

According to Gaza's Health Ministry, more than 480 Palestinians have been killed by Israeli fire since the ceasefire began. These casualty records are generally considered reliable by U.N. agencies and independent experts. Israel disputes the figures but has not provided its own data.