MUFG: EUR/USD risks below parity this quarter as Trump’s trade focus shifts

MUFG notes that Trump’s inauguration speech, with a heavier focus on immigration than trade, has reduced immediate risks for EUR/USD to drop below parity in Q1. However, trade-related uncertainties persist, particularly around potential tariff actions later this year.

Key Points:

• Trade Policy Focus and Market Expectations:

  • Trump’s speech emphasized immigration over immediate trade measures, dampening market fears of aggressive early tariff actions.
  • Trade reviews have been scheduled for key agreements (e.g., Phase 1 deal with China, USMCA, and export controls), with findings due by April 1.

• European Exposure to Trade Risks:

  • Europe faces potential tariff threats, particularly linked to natural gas purchases from the US, though specifics remain vague.
  • The lack of immediate action on Europe and China lowers the urgency of trade-related EUR downside risks in Q1.

• FX Market Reaction and USD Positioning:

  • The USD rally suggests markets were pricing in more aggressive trade moves.
  • With ambiguity around the timing and nature of tariff announcements, USD selling is likely capped, but immediate EUR/USD downside risks have diminished.

Conclusion:

While the long-term threat of tariffs and trade tensions remains, the reduced immediacy of aggressive US actions has lessened the risk of EUR/USD breaking below parity this quarter. Markets will likely shift their focus to the April 1 review date, where the trade narrative could reignite.

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This article was written by Adam Button at www.forexlive.com.