The Euro has seen a recovery as the effects of the robust US Nonfarm Payrolls report lessen. Concerns about US tariffs and fiscal health are affecting the US Dollar. ECB President Lagarde and MPC member Villeroy suggest stable interest rates in July.

The EUR/USD pair is regaining some strength, trading in the higher 1.1700s range. The Dollar is losing its post-NFP gains amid tariff worries and statements from the European Central Bank, with ECB officials reinforcing a 2% inflation target.

Eurozone Economic Weakness

US market conditions remain subdued due to the Independence Day holiday, with EUR/USD showing a moderate weekly advance. Recent strong US economic reports have reduced expectations of a July rate cut by the Federal Reserve, now at 5%.

Economic data shows Eurozone weaknesses, with PPI declining and German Factory Orders contracting. France’s industrial output fell, adding pressure on the Euro amid weak economic indicators. The Eurozone services sector showed slight growth in June.

EUR/USD is facing difficulty maintaining levels above 1.1800, showing potential bearish signals. Despite recent highs, resistance points exist at 1.1800 and beyond, with downside targets near 1.1710.

Tariffs, differing from taxes, are levied on imports to protect domestic markets. Trump plans to implement tariffs to support US producers, targeting main trading partners like Mexico, China, and Canada, using tariff revenue to reduce income taxes.

Markets have begun to shake off the immediate pressure from the US employment surge, and with it, the earlier upward push in the Dollar is showing early signs of exhaustion. The narrative, at least for now, is shifting from robust hiring to concerns over sustainability—particularly tied to the fiscal and trade fronts. We interpret this as the market beginning to price in broader risks unrelated to labour.

Lagarde and Villeroy, holding steady in their recent commentary, seem increasingly aligned in pushing the idea that drastic monetary adjustments are off the table this summer. That does not guarantee smooth sailing for the Euro, but it takes one variable out of the picture. With clarity around rate policy, focus will now rotate to structural economic weakness in the Eurozone—which cannot be dismissed, especially as fresh data continue to disappoint.

Implications of US Trade Policies

We’ve observed PPI slipping, Factory Orders in Germany retreating for another month, and now, French production fading as well. That alone might appear routine, but together, these data points expand into a broader concern for Q3 performance. Services in the bloc are managing a slow drip of growth, but not nearly enough to offset the manufacturing drag. This creates an asymmetric backdrop where any resurgence in US data, even mild, could tilt EUR/USD lower again.

The recent move upwards in the common currency, bringing it near the upper 1.1700s, is more a retracement than a trend shift. The pair is not comfortably holding above 1.1800, and that matters. We’ve identified resistance stacking at that threshold, likely amplified by options exposure and stop signals. On the other side, support looks weak near 1.1710—closing below that may open up further softness, if momentum turns.

Rate expectations out of the Fed are proving sticky. July now seems unlikely for any cuts, with odds sitting at just 5%. That kind of market positioning suggests treasuries may stay locked in range as everyone waits for CPI or earnings to tilt sentiment meaningfully. Given that, the FX side might act based on sentiment rather than policy for the immediate future.

Trade rhetoric isn’t helping sentiment either. With Trump pushing tariffs again, especially against the bloc’s major economic players, we take a more cautious stance. These proposals aren’t taxes in the typical sense; they target key supply routes under the guise of protecting industry. If enacted—or even brought closer to passage—they shift trade balances and currency flows. Safe havens and export-linked crosses could move first.

With volume lighter due to the US holiday and European desks growing more sensitive to forward data, one should examine implied volatility closely. Watch spreads between front-end Eurodollar and Euribor contracts. While not predicting outright direction, they increasingly reveal where hedging pressure is building anew.

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