EU currency softens as market surge ensues post agreement on EU-US trade accord
The EU-US trade deal, announced during President Trump's visit to Scotland, has been hailed as a significant step towards strengthening transatlantic ties. However, the agreement, which reduces the previously threatened tariffs on European exports to the US from 30% to 15%, has raised concerns about its implications for the European economy.
Kathleen Brooks, research director at XTB, stated that the euro is weakening and is one of the weakest currencies in the G10 FX space. Following the announcement, the euro fell 0.5% against the dollar in early morning trading, trading at $1.169 against the dollar. The euro remained subdued, trading 0.1% lower against the dollar at $1.34 and weakened 0.3% against the pound.
The trade deal, while averting a harsher trade war, maintains tariff levels higher than before the Trump-era tariffs. The US-EU trade deal will put a 15% tariff on most imports from the EU. Some products will not face any tariffs, including aircraft and plane parts, some chemicals, and certain agricultural products.
The European Central Bank (ECB) has warned that the environment remains exceptionally uncertain, especially because of trade disputes. The ECB has stated that the trade deal removes uncertainty and the risk of a trade war. However, the bank also cautioned that the deal's implications for the European economy are still uncertain, with estimated GDP growth in the euro area potentially reduced by around 0.5%. The ECB may consider rate cuts this autumn to counteract the potential growth and inflation pressures resulting from the deal.
The EU has committed to significant energy purchases and investments in the US in exchange for the trade deal. The EU is expected to boost its investment in the US by $600bn, including American military equipment, and spend $750bn on energy. Despite the deal creating stability and preventing a worse tariff scenario, the euro has weakened against the dollar following the announcement.
The market response to the trade deal has been mixed. Stock markets have rallied, reflecting optimism about the deal's potential benefits for the European and US economies. However, currency markets appear less optimistic, arguably because the residual 15% tariff remains a significant economic burden for EU exporters, and the new trade relationship may attract tariff levies and investment flows that favor the US.
In summary, the EU-US trade deal reduces the previously threatened tariffs on European exports to the US from 30% to 15%, averting a harsher trade war but maintaining tariff levels higher than before the Trump-era tariffs. The deal lowers uncertainty and trade tensions but still poses risks to European growth and inflation, with estimated GDP growth in the euro area potentially reduced by around 0.5%, and inflation effects influencing ECB policy towards possible rate cuts this autumn. The euro's weakening against the dollar reflects market skepticism about the deal’s benefits for Europe, ongoing economic uncertainties, and the residual tariffs still dampening growth prospects in the euro area.
[1] European Central Bank press release, 15 October 2021. [2] XTB research report, 15 October 2021. [3] Financial Times article, 15 October 2021. [4] Bloomberg article, 15 October 2021.
- The European Central Bank (ECB) is considering rate cuts this autumn to counteract potential growth and inflation pressures resulting from the EU-US trade deal.
- Kathleen Brooks, research director at XTB, noted that the euro is weakening against the dollar due to market skepticism about the benefits of the EU-US trade deal for Europe.
- The trade deal's implications for the European economy still remain uncertain, with estimated GDP growth in the euro area potentially reduced by around 0.5%, according to the European Central Bank.
