Can EU Trade Strategy Counter the Trump Tariff Challenges?

Economic

Summary:

As the Commission struggles to find new outlets for its exports, the question of whether this will be enough in the face of the tariffs Donald Trump is threatening to impose remains open.

In Davos, on Tuesday, the President of the European Commission, Ursula von der Leyen, announced that the EU would shortly be relaunching its strategic partnership with India, and the executive has confirmed that the entire College of Commissioners will visit the country in the spring.

In the space of just a few days, the European Commission has announced an update of its trade agreement with Mexico, the relaunch of the negotiations with Malaysia and forthcoming trade talks with India.

All this on top of an agreement reached before Christmas with the Mercosur countries - Brazil, Argentina, Uruguay, and Paraguay - and another one with Switzerland.

With Donald Trump threatening European imports with 20% tariffs, the EU is urgently diversifying its export markets.

The Mercosur agreement is the biggest trade deal ever signed by the EU. It will create a market of nearly 800 million citizens and will slash tariffs, saving EU companies €4 billion annually. The Switzerland comprehensive bilateral trade agreement is worth €550 billion.

The trade agreement with Mexico, a country that Donald Trump is directly threatening with customs duties, eliminate tariffs of up to 100% on key EU exports such as cheese, poultry, pork, pasta, apples, jams and marmalades, as well as chocolate and wine. It also extends the protection of geographical origin labels for European products.

EU-Mexico trade in goods reached €82 billion in 2023, while two-way trade in services reached €22 billion in 2022.

As planned by the Mercosur free trade agreement reached in December, the Mexico agreement also opens public procurements to European companies.

“The EU as a bloc is an export-orientated economy. It therefore benefits from reducing tariff barriers with foreign partners via free trade agreements,” Arthur Leichthammer, from the Delors Institute in Berlin said, adding that “it is often said that free trade agreements benefit German industry, particularly the automotive sector, but due to the deeply integrated European value chains, the economic benefits are much more dispersed.”

But will these deals offset the effects of potential US tariffs? In 2023, the US was the largest partner for EU exports of goods, with the latter benefiting from a trade surplus of $131.3 billion in 2022. High US tariffs risk cutting the EU off from this manna.

“We have to find an arrangement with the US because we can't in the short term really compensate our trade with the US with other countries,” MEP Bernd Lange (Germany/S&D), chair of the European Parliament’s trade committee, told Euronews’ Radio Schuman Podcast, adding: “At the moment, around about 20% of our exports go to the US.”

Friedrich Merz, the Christian Democrat candidate for German Chancellor, favours negotiating a US trade agreement, but France remains sceptical.

“The Americans want the Europeans to take more responsibility, particularly in the area of defence and security. The Trump administration's big demand is to stop paying for Europeans' security,” one senior EU official said, adding that it can be done but “on economic terms that are favourable to Europeans.”

According to this official, the Europeans should tell the US: “We are dealing with the border with Russia, the reconstruction of Ukraine and our security, but we cannot do that with a trade war from the United States."

A silver lining for the EU - if not for the storm clouds of climate change - may be that Joe Biden's flagship US Inflation Reduction Act tax incentive programme for green industries could be scrapped by Trump. The new US president has ordered US federal agencies to “immediately pause” the spending of money from the Inflation Reduction Act. The threat of European industries relocating to US soil to take advantage of the IRA might then recede.

Source: Euronews

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ING

Economic

The first jobs report of the year paints a familiar picture of the UK labour market. Wage growth remains hot, and indeed excluding bonuses, was a tad hotter than expected at 5.6% year-on-year. That said, if you to get really into the details, the month-on-month increase in private-sector pay – a metric the Bank of England occasionally looks at – appeared more muted in the latest period. But generally, these figures have been proving uncomfortably sticky for the Bank.

At the same time, plenty of evidence shows that the jobs market is continuing to cool down. Remember, don’t pay any attention to the unemployment rate, plagued by long-running and well-known quality issues. Instead, take a look at vacancies. These were down fractionally in the latest data, and more importantly, most sectors now have vacancy rates below pre-Covid levels – in some areas quite significantly so. Just look at hospitality or retail.

Vacancy rates below pre-Covid levels in most sectors

UK Wage Growth Elevated Even as Jobs Market Cools_1

Then there’s payrolled employment, which is perhaps the most reliable jobs indicator we have right now. If we strip out government-dominated sectors like health and education, the number of payrolled employees fell by 0.9% across 2024. That’s not a huge number, but this all points to a backdrop where wage growth can come lower across 2025. Indeed if we look at the latest couple of readings from the Bank of England’s own Decision Maker Panel (a survey of CFOs), it shows that expected wage growth has finally slipped below 4% as of the past couple of readings.

Payrolled employment fell in 2024 outside of government-heavy sectors

UK Wage Growth Elevated Even as Jobs Market Cools_2

Nothing here is likely to change the Bank of England story dramatically, and it looks like policymakers are on course to continue gradually taking rates lower and probably more rapidly than markets now expect. Investors are largely pricing a February rate cut, but only 60 basis points of total easing this year.

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Warren Takunda

Economic

Recent losses have caused the Pound to trade well below the level suggested by the models at the world's major investment banks.

A look at the consensus forecasts from over 30 of the biggest investment banks allows us to get a sense of where we would expect a currency to return after periods of volatility.

In this regard, the median and mean projections are a useful resource.

The current median forecast for Q1 - which can be viewed in this free document - shows a likelihood of recovery, as the target for the Pound to Euro exchange rate is set well above 1.20.

The Pound has fallen through January, making it the year's worst-performing G10 currency. Based on current trends, forecasters who were pencilling in targets below 1.20 will contend for the prize of the most accurate forecaster in Q1.

Pound Sterling weakness follows a string of surprisingly soft economic data that suggested the government won't manage to hit its revenue targets.

This prompted nervousness in bond markets, pushing up the cost of borrowing for the UK government and resulting in a fall in the Pound.

Nevertheless, this week sees Pound Sterling stabilise against most of its peers, including the Euro and although it's been a poor January, there are two more months to navigate before the Q1 scorecard can be drawn up.

A recovery in GBPEUR would likely require the UK to start printing some above-consensus data and for Donald Trump to impose import tariffs on the EU.

Strategists at Citibank say the Pound's selloff against the Euro is reaching its limits and a turnaround nears.

In a recent note, Citi's Global FX Strategy desk says it is time to "Short EURGBP". Strategists said the selloff in GBP would end when one of three conditions was met:

(1) global fixed income yields peak;(2) a UK policy announcement to temper markets or a reversal in sentiment around fiscal concerns; or(3) a move towards 0.8470-0.85 where risk/reward is more attractive for shorts.

"Condition three has effectively been met," says Citi, triggering the recommendation to sell EURGBP in anticipation of Sterling's recovery.

Also, last week's below-consensus inflation data from the UK and U.S. appear to have halted the rise in fixed-income yields, at least for now.

"We think risk/reward is attractive to try a tactical EURGBP short here against the 55wma with potential for a move back towards the multi-year lows around 0.8250," says Citi.

EURGBP at 0.8250 implies a GBPEUR target of 1.2121, implying that a recovery back to the top of recent ranges is possible.

Source: Poundsterlinglive

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Michelle

Economic

Forex

EUR/USD started a decent upward move above the 1.0350 resistance. USD/JPY is correcting gains and now consolidates below 156.00.

Important Takeaways for EUR/USD and USD/JPY Analysis Today

The Euro found support and started a recovery wave above the 1.0360 resistance zone.

There is a key bullish trend line forming with support near 1.0395 on the hourly chart of EUR/USD at FXOpen.

USD/JPY is trading in a bearish zone below the 157.00 and 156.60 levels.

There is a connecting bearish trend line forming with resistance near 155.90 on the hourly chart at FXOpen.

EUR/USD Technical Analysis

On the hourly chart of EUR/USD at FXOpen, the pair started a fresh increase from the 1.0265 zone. The Euro climbed above the 1.0310 resistance zone against the US Dollar.

The pair even settled above the 1.0350 resistance and the 50-hour simple moving average. Finally, it tested the 1.0435 resistance. A high is formed near 1.0434 and the pair is now consolidating gains. There was a minor decline below the 23.6% Fib retracement level of the upward move from the 1.0266 swing low to the 1.0434 high.

Immediate support is near the 1.0395 level. There is also a key bullish trend line forming with support near 1.0395. The next major support is at 1.0350 and the 50% Fib retracement level of the upward move from the 1.0266 swing low to the 1.0434 high.

If there is a downside break below 1.0350, the pair could drop toward the 1.0310 support. The main support on the EUR/USD chart is near 1.0265, below which the pair could start a major decline.

On the upside, the pair is now facing resistance near 1.0435. The next major resistance is near the 1.0450 level. An upside break above 1.0450 could set the pace for another increase. In the stated case, the pair might rise toward 1.0550.

USD/JPY Technical Analysis

On the hourly chart of USD/JPY at FXOpen, the pair started a steady decline from well above the 158.00 zone. The US Dollar gained bearish momentum below the 157.00 support against the Japanese Yen.

The pair even settled below the 156.60 level and the 50-hour simple moving average. There was a spike below 155.00 and the pair traded as low as 154.77. It is now correcting losses and trading above the 50-hour simple moving average and the 50% Fib retracement level of the recent decline from the 156.58 swing high to the 154.77 low.

Immediate resistance on the USD/JPY chart is near a connecting bearish trend line at 155.90. It is near the 61.8% Fib retracement level of the recent decline from the 156.58 swing high to the 154.77 low.

The first major resistance is near the 156.60 zone. If there is a close above the 156.60 level and the hourly RSI moves above 60, the pair could rise toward 157.00. The next major resistance is near 157.70, above which the pair could test 158.50 in the coming days.

On the downside, the first major support is near 155.35. The next major support is near the 154.80 level. If there is a close below 154.80, the pair could decline steadily. In the stated case, the pair might drop toward the 154.00 support.

Source: ACTIONFOREX

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ING

Economic

Forex

USD: Volatility here to stay

The first day of Donald Trump's presidency was a volatile one for FX markets. The dollar tumbled before the inauguration as markets got tipped off by media reports that Trump would not impose tariffs on day one. The large dollar long positioning into the event and potentially some thinner liquidity due to US holiday may have exacerbated the move.

In the slew of day-one executive orders, Trump confirmed the establishment of the External Revenue Service tasked with collecting tariff and duties. Other executive orders declared a national emergency at the border and on energy, and unwinding some of former president Joe Biden’s green energy measures.

However, later in the day, Trump said he would likely impose 25% tariffs on Canada and Mexico by 1 February. That generated a rebound in the dollar – with CAD and MXN erasing daily gains. Still, DXY is trading around 0.7% off Friday’s close, as markets are at least cautiously optimistic that indiscriminate universal tariffs won’t be delivered all in one go. Understandably, European currencies and those exposed to China are receiving the most support.

At this point, there is more downside room for CAD and MXN to fall should Trump follow through with the tariff threat. Canada is currently led by outgoing prime minister Justin Trudeau, about to face a Liberal Party leadership contest for his replacement, and likely to face early elections. It was reported that Canadian officials had already laid out plans to retaliate against US tariffs targeting products that would asymmetrically damage US producers compared to the domestic impact on consumers.

We estimate USD/CAD is embedding just above 2% in risk premium (i.e., overvaluation). That is less than in previous weeks, signalling markets may still not fully price in the 25% tariff risk and opening up more upside potential for the pair. Canada will also release CPI data today, but that will likely have limited impact on the currency. We expect a USD/CAD rally north of the 1.45 area for now.

Despite yesterday's positioning readjustments, dollar net longs likely remain stretched. For reference, we calculate that CFTC net dollar positioning versus reported G10 currencies (i.e., G9 excluding SEK and NOK) was at +24% a week ago, the highest since June 2019 (when Trump was in office). With that in mind, European currencies and China proxies (AUD and NZD) can hang on to gains for a little longer.

Data will play a secondary role this week as all the attention will be on Trump’s first executive orders. Incidentally, the Federal Reserve is in the quiet period ahead of next Wednesday’s meeting. Expect a lot of “headline trading” and short-term noise, with risks still skewed for a stronger dollar.

EUR: Short-term upside room in the crosses

EUR/USD remains cheap and oversold despite yesterday’s rebound. We estimate that the pair is still trading around 1.5% below its short-term fair value, signalling some tariff related risk remains in the price.

The euro could fare well in the crosses if more days pass without Europe being explicitly mentioned in Trump’s tariff comments. That support may, however, prove rather short-lived as things can – as we learned yesterday with Canada and Mexico – change abruptly on protectionism, and the euro remains generally unappealing from a number of macro fundamentals. This means any rebound may well fall short of 1.050 in EUR/USD.

On the data side, today’s ZEW surveys out of Germany will tell us whether there is any glimmer of hope in the otherwise gloomy activity picture. Expectations are for broadly unchanged reads since December, which would confirm the recessionary mood.

GBP: Uneventful jobs data release

EUR/GBP was unfazed this morning by the release of UK labour figures. Wage growth excluding bonuses was slightly higher than expected. However, the month-on-month increase in private sector pay, which the Bank of England (BoE) closely monitors, was more subdued.

This figure has been fluctuating and follows a stronger reading previously. Unemployment figures have been rather unreliable, but there are still broad indications that the jobs market is cooling enough to reduce wage growth over the year ahead. The BoE’s recent CFO survey shows expected wage growth dropping below 4% in recent months. This doesn’t significantly alter the BoE’s outlook, with a February rate cut still our base case.

EUR/GBP is looking at some upside risks in the short term as markets can still price in more Bank of England easing and continue to embed idiosyncratic GBP risks related to higher borrowing rates. At the same time, as discussed above, the euro could see some tentative relief on Trump not targeting the EU with tariffs for now.

CEE: Outperforming EM space

Similarly to yesterday, the calendar in the CEE region is empty today and we will see more in the second half of the week. Only political speakers are scheduled in Hungary today, which usually triggers market headlines. CEE currencies rallied yesterday, similarly to the EM space, following the US tariff headlines. While some gains were erased, CEE currencies outperformed the EM space by the end of the day.

As we discussed yesterday, EUR/PLN moved down the trading range to 4.250-270 and it looks like we will test the lower bound in the coming days thanks to the hawkish National Bank of Poland support. EUR/HUF also briefly touched 410, this year's lows, allowing HUF assets to show some rally as well.

In the medium-term we expect EUR/HUF to head towards 420, but in the short-term we believe the pair can stabilise around 412. EUR/CZK also briefly headed lower but saw the biggest pull back within CEE yesterday, and we believe it will stay closer to 25.300 until the Czech National Bank shows more dovish headlines ahead of its February meeting, which could be as early as the end of this week.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Economic

Stocks

London stocks were set to nudge up at the open on Wednesday as figures revealed the government borrowed more than expected in December.

The FTSE 100 was called to open just five points higher.

According to the Office for National Statistics, the government borrowed £17.8bn in December, above the £14.6bn expected by the Office for Budget Responsibility and consensus expectations of £14.2bn.

It was also the highest figure in four years and the third-highest December figure on record.

Alex Kerr, UK economist at Capital Economics, said: "Against a backdrop of slowing GDP growth and high interest rates, December’s overshoot in borrowing is further disappointing news for the Chancellor.

"That said, most of the overshoot was because of a one-off payment and components that are heavily revised so the figures may not be as bad as they first appear. But the figures leave the current budget deficit on track to overshoot the OBR’s forecast of £55.5bn in the 2024/25 fiscal year by around £1.5bn."

In corporate news, budget airline easyJet said it was on track to hit targets this financial year after an in-line performance over its first quarter, as losses halved year-on-year.

The company reported a headline loss before tax of £61m for the three months to 31 December, compared with a loss of £126m a year earlier, as group revenues rose 13% to £2.04bn.

EasyJet said it was seeing strong demand heading into a traditionally busy Easter period, while bookings continue to build for summer.

Pub chain Wetherspoons said rises in the minimum wage would cost £60m as it reported a 5.1% jump in like-for-like sales in the 25 weeks to 19 January.

Bar sales increased by 4.5%, food by 5.6% and slot/fruit machines by 11.7%. Hotel room sales fell 6.5%.

Trainline welcomed the UK government's commitment to maintaining a competitive rail ticket retail market, as part of Great British Railways (GBR).

The FTSE 250 company said the transition to the new nationalised train operator would take several years, adding that it supported the government's emphasis on ensuring a level playing field for all retailers. It said it would participate in the upcoming industry-wide consultation on the Rail Reform Bill.

Source: Sharecast

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Owen Li

Economic

GBPUSD is falling by approximately 0.9% from early morning highs, reversing two-thirds of the gains following reports that Trump will not immediately implement trade barriers but will begin with a job evaluation process.

Jobless claims rose by 0.7K in December, against expectations of 10.3K. After two months of decreases totalling 36K, the trend of increasing unemployment from April to September appears to have halted. Pound Declines After Rebound Despite Labour Market_1

Pound Declines After Rebound Despite Labour Market_1

The rate of wage growth accelerated from 5.2% to 5.6% last year, showing a positive trend from August’s 3.9%. The acceleration in wage growth could indicate potential inflationary pressures that might lead the Central Bank to adopt a less dovish stance than previously anticipated. Pound Declines After Rebound Despite Labour Market_2

Pound Declines After Rebound Despite Labour Market_2

The coinciding timing of the local bottom in the labour market with the cycle of rate cuts starting in August is likely coincidental. Policy changes typically take several months to quarters to impact the economy.

Moreover, the unemployment rate has risen to 4.4%, and the number of unemployed has been increasing for the past eight months. Alongside rising wages, this may reflect a trend of cutting lower-paid jobs, which raises the average wage growth rate but negatively impacts overall spending. The recent news of a 0.6% month-on-month decline in retail sales excluding fuel could be an early warning sign of this trend.

GBPUSD soared up to 1.2340 on Monday but fell by 90 pips to 1.2250 on Tuesday, with strong support from last April acting as resistance. This may indicate the end of the bounce as the pound lost momentum near the 61.8% retracement level of the decline from the December peak to the January low. Confirmation of strong bearish sentiment would be a return to the lows at 1.21. Falling below this level could trigger a Fibonacci extension pattern, potentially leading to a decline to 1.1660. Historically, the Pound has only been below this level for one week in March 2020 and ten weeks in the latter part of 2022.

Trump’s firm commitment to reducing the US trade deficit is benefiting bears in GBPUSD, as seen in the trends observed in 2018-2019 during periods of trade disputes. Pound Declines After Rebound Despite Labour Market_3

Pound Declines After Rebound Despite Labour Market_3

Source：actionforex

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Can EU Trade Strategy Counter the Trump Tariff Challenges?

Source: Euronews

UK Wage Growth Elevated Even as Jobs Market Cools

Vacancy rates below pre-Covid levels in most sectors

Payrolled employment fell in 2024 outside of government-heavy sectors

Pound to Euro Rate to Recover Above 1.20: Investment Bank Forecasts

Source: Poundsterlinglive

EUR/USD Starts Increase While USD/JPY Corrects Gains

Important Takeaways for EUR/USD and USD/JPY Analysis Today

EUR/USD Technical Analysis

USD/JPY Technical Analysis

Source: ACTIONFOREX

Day one volatility

USD: Volatility here to stay

EUR: Short-term upside room in the crosses

GBP: Uneventful jobs data release

CEE: Outperforming EM space

London Pre-Open: Stocks to Nudge Up as Govt Borrowing Jumps to £17.8bn

Source: Sharecast

Pound Declines After Rebound Despite Labour Market

Source：actionforex

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