A sharp drop of 1.3%! The euro encountered a "dark day", and the eurozone economy may shrink by 0.4%
2025-07-29 10:34:32
The euro/dollar pair fluctuated narrowly against the US dollar during the Asian session on Tuesday (July 29th) Beijing time, currently trading around 1.1598, up about 0.1%. On Monday, EUR/USD plummeted 1.3% as the market continued to digest the impact of the new US-EU trade framework. The decline was driven by the euro's weakness against other currencies and the dollar's strength against a broad basket of currencies, reflecting a renewed shift in investor interest toward US assets.
The euro's weakness wasn't limited to the US dollar. EUR/GBP and EUR/JPY also fell, confirming widespread selling pressure. Meanwhile, a sharp drop in AUD/USD and another surge in USD/CAD underscored the firm grip that US dollar bulls have on the market, fueled by widening interest rate differentials.
Criticism of the US-EU agreement has intensified within the eurozone. Many see the deal as skewed towards the US, extracting sweeping energy purchase and investment commitments from the EU while imposing 15% tariffs on most goods—a significant increase from pre-Trump levels. The agreement is seen as more of a damage-and-control exercise than a breakthrough in trade relations.
"We understand that the agreement is a framework agreement and some details are still to be finalized," UBS analysts said in a note. Sector investigations into sectors such as semiconductors could lead to new tariffs on those sectors two weeks later. However, these tariffs have exacerbated a significant deterioration in the EU's export situation. UBS estimates that the weighted average tariff rate currently faced by EU exports to the United States will rise to 15.2% from about 1.5% before April 2. This could result in a 0.2 to 0.4 percentage point reduction in eurozone economic growth over the next year. Analysts say the blow could be more severe due to the hit to household and business confidence.
French Prime Minister Francois Bayrou called the deal a "dark day for Europe," arguing that the EU had caved in to Washington. The sentiment reflects deeper discontent within the euro zone, particularly among sectors hardest hit by the tariff hikes.
German Chancellor Merz said that US tariffs mean that the German economy will bear a "heavy burden." He also said that time will prove that tariffs on the European Union are not in the interests of the United States.
Although German and French stocks opened higher on Monday, the gains quickly faded as market participants reassessed the pros and cons.
Barclays analysts said in a report that US tariffs could push up US inflation and depress eurozone inflation, leading to a depreciation of the euro against the dollar. They said the inflation outlook increases the likelihood that the European Central Bank will cut interest rates more than currently expected, while the Federal Reserve is likely to remain on the sidelines. "Interest rate differentials have widened, and the euro has become expensive as a common currency," Barclays said.
In the United States, the trade deal is seen as a strategic victory. Investors believe that transatlantic relations have regained clarity, while high tariff barriers could further push up US inflation. This, in turn, could reinforce the Federal Reserve's cautious stance. While a September rate cut remains a possibility, the pace of reductions is likely to be slow and cautious.
The Euro closed with a long real body bearish candlestick, breaking below the 10- and 20-day moving averages, as well as the middle line of the ascending channel. Support is near the 50-day moving average, and the MACD is returning to its mid-axis line. The RSI is showing a bearish continuation, with no divergence. The market's reaction to the real body bearish candlestick remains to be seen, as will the effective attack on 1669. 1669 marks the watershed between bulls and bears in this round of trading, marking the intersection of the middle line of the ascending channel and the midpoint of the bearish candlestick's real body.
(Euro/USD daily chart, source: Yihuitong)
At 10:33 Beijing time, the euro is trading at 1.1598/99 against the US dollar.
The euro's weakness wasn't limited to the US dollar. EUR/GBP and EUR/JPY also fell, confirming widespread selling pressure. Meanwhile, a sharp drop in AUD/USD and another surge in USD/CAD underscored the firm grip that US dollar bulls have on the market, fueled by widening interest rate differentials.
Criticism of the US-EU agreement has intensified within the eurozone. Many see the deal as skewed towards the US, extracting sweeping energy purchase and investment commitments from the EU while imposing 15% tariffs on most goods—a significant increase from pre-Trump levels. The agreement is seen as more of a damage-and-control exercise than a breakthrough in trade relations.
"We understand that the agreement is a framework agreement and some details are still to be finalized," UBS analysts said in a note. Sector investigations into sectors such as semiconductors could lead to new tariffs on those sectors two weeks later. However, these tariffs have exacerbated a significant deterioration in the EU's export situation. UBS estimates that the weighted average tariff rate currently faced by EU exports to the United States will rise to 15.2% from about 1.5% before April 2. This could result in a 0.2 to 0.4 percentage point reduction in eurozone economic growth over the next year. Analysts say the blow could be more severe due to the hit to household and business confidence.
French Prime Minister Francois Bayrou called the deal a "dark day for Europe," arguing that the EU had caved in to Washington. The sentiment reflects deeper discontent within the euro zone, particularly among sectors hardest hit by the tariff hikes.
German Chancellor Merz said that US tariffs mean that the German economy will bear a "heavy burden." He also said that time will prove that tariffs on the European Union are not in the interests of the United States.
Although German and French stocks opened higher on Monday, the gains quickly faded as market participants reassessed the pros and cons.
Barclays analysts said in a report that US tariffs could push up US inflation and depress eurozone inflation, leading to a depreciation of the euro against the dollar. They said the inflation outlook increases the likelihood that the European Central Bank will cut interest rates more than currently expected, while the Federal Reserve is likely to remain on the sidelines. "Interest rate differentials have widened, and the euro has become expensive as a common currency," Barclays said.
In the United States, the trade deal is seen as a strategic victory. Investors believe that transatlantic relations have regained clarity, while high tariff barriers could further push up US inflation. This, in turn, could reinforce the Federal Reserve's cautious stance. While a September rate cut remains a possibility, the pace of reductions is likely to be slow and cautious.
Technical aspects:
The Euro closed with a long real body bearish candlestick, breaking below the 10- and 20-day moving averages, as well as the middle line of the ascending channel. Support is near the 50-day moving average, and the MACD is returning to its mid-axis line. The RSI is showing a bearish continuation, with no divergence. The market's reaction to the real body bearish candlestick remains to be seen, as will the effective attack on 1669. 1669 marks the watershed between bulls and bears in this round of trading, marking the intersection of the middle line of the ascending channel and the midpoint of the bearish candlestick's real body.
(Euro/USD daily chart, source: Yihuitong)
At 10:33 Beijing time, the euro is trading at 1.1598/99 against the US dollar.
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