Tariff Tensions Propel EURUSD to 3-Year High

The euro might have failed to sustain the 1.14 handle against the US dollar (EURUSD) on Monday, 14 April, but it soared to a 3-year high last week following the 90-day pause of reciprocal tariffs announced by US President Donald Trump last Thursday. 

Naturally, the forex pair has taken the backseat with the ECB meeting looming large on Thursday, 17 April. However, markets remain convinced (with a 95% chance) that the central bank will cut its interest rates, suggesting trade rhetoric could continue to dominate.

What Drove EURUSD Higher?

The recent rally in EURUSD reflects a broader weakness in the dollar (DXY) emanating from economic concerns, trade tensions, and falling inflation in the US. The CPI print last Thursday showed inflation increasing at its slowest pace in five years, reigniting calls for imminent rate cuts by the Fed. Even the Fed’s Waller said that Trump’s hefty tariffs, should they be implemented, will significantly slow down the US economy, forcing the Fed to cut its benchmark rates sooner. 

Meanwhile, the White House decided to take a softer stance against most trading partners last week, but China still faces tariffs of up to 145%. On the other hand, the European Union (EU) decided to delay its reciprocal tariffs. Trade Commissioner Maros Sefcovic is in Washington discussing zero-to-zero tariffs and working on non-tariff barriers.

Some analysts see the escalation between the US and China as an opportunity for China to sell its goods to Europe, even at a lower price. While diversifying products to Europe offers a compensatory advantage and may have contributed to recent sentiment, industry experts worry about competition. The US-Sino tariff backdrop weakens confidence in US-backed assets, which continues to weigh on the buck.

Can the Rally Continue?

The current tit-for-tat and Trump’s volatile decision process weigh on dollar confidence, with the US index hovering below the 100 barrier and investors moving away from US Treasuries into the Eurozone. Even with sentiment shifting in the short term due to softer stances against trading partners or other positive catalysts, the performance of the dollar will remain tied to trade rhetoric, which is rich with Trump’s protectionist policies. In fact, the greenback and US Treasuries currently display a high degree of risk, echoing rising worries of recession, with the euro and other currencies reflecting the outflows rather than interest rate dynamics.

That said, the ECB’s upcoming decision is on Thursday, 17 April, and 80% of the next decision is in July, for that matter, and is well-priced and somewhat overshadowed by tariff rhetoric. As such, the focus will likely be on whether the accompanying statement changes, especially since this round comes without updates on macro forecasts as the previous ECB meeting did, or if, by surprise, the ECB proceeds with a double rate cut. It is worth mentioning, however, that Deutsche Bank (DBK.DE) recently downgraded the Eurozone GDP growth to 0.5 % from 0.8%  for 2025, with further downgrades hinging on tariff increases.

What Is the EURUSD Outlook?

EURUSD soared from around 1.0940 to near 1.14 during the 2-day Thursday-to-Friday session last week, adding 4% to its gains. However, analysts at ING believe the pair is currently overbought and expect the rally to continue up to only around 1.15 for a 6% gain in the short term. (Source: Morningstar)

UBP analysts expect this trend to continue into 2026, eyeing the 1.20 level, while some others say that Trump’s goal to weaken the dollar is unfolding. Notably, MUFG and Goldman Sachs reversed their previous forecast for the 12 months to 1.20.

With analysts expecting US inflation to surge again, GDP to contract, and fiscal deficit to balloon, confidence in the dollar may shrink further as the buck detaches from interest rate spreads. As a result, and as long as the tariff outflows continue, investment banks are worried that the Treasury sell-off might accelerate and give EURUSD a further boost. 

Notably, the development of the euro trade will depend on multiple factors, including the situation between Ukraine and Russia. However, JPMorgan analysts said that the next supply zone rests at around 1.15, which was the high seen in February 2022 at the onset of the Ukraine invasion, a “mega bullish” fundamental shift back then.

Conclusion

With EURUSD hovering below 3-year highs, traders keep a close eye on Thursday's ECB meeting for clues on European monetary policy. However, trade rhetoric is currently outweighing policy dynamics, and markets already expect the bank to cut now and in July.

With multiple investment banks revising their EURUSD outlook to 1.20, the greenback's troubles are beginning despite potential short-term pullbacks. Still, no prediction comes with guarantees, and trading the eurodollar could lead to financial losses.

*Past performance does not reflect future results