EURUSD: Next Target 1.0427

Looking at the implications of Trump’s handling of the Mexico and Canada tariff threat, sentiment in the eurozone has improved on the back of expectations that a deal can be struck and protectionism averted. Still, extra caution is warranted in this sense. If part of Trump’s motive to delay tariffs on US neighbours was domestic backlash for potential immediate economic pain for US consumers, that is not necessarily true for EU tariffs. On those, Trump can afford to play the longer game, and perhaps keep them in place for a prolonged period, making the EU feel some “pain” before striking a deal. Crucially, the motives for tariffs on the EU would not be border-related, where a deal is arguably quicker to achieve as we saw yesterday, but on trade imbalances, which often require longer negotiations.

With all this in mind, we are somewhat sceptical that the euro is bound for a major rally. Trump has already hinted the EU is next on the tariff list, and markets may probably find better value in buying the dips in currencies that have passed the protectionism peak against the euro, which is still to face the worst of it. We would expect a US-China trade deal to take EUR/USD close to 1.0400/1.0450, but the rally may lose steam around those levels.