EUR/USD rises to near 1.0500, upside seems limited due to increased risk aversion
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Akhtar Faruqui
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04 Mar @ 02:06 (GMT+0)

EUR/USD rises to near 1.0500, upside seems limited due to increased risk aversion

  • EUR/USD extends its gains on hopes for a potential Ukraine peace deal.
  • The Euro may struggle as risk sentiment worsens due to global tariff war fears.
  • The US has paused all military aid to Ukraine under orders from President Trump.

EUR/USD continues its upward momentum for the second consecutive session, trading around 1.0490 during Asian hours on Tuesday. The Euro (EUR) received support from rising hopes for a potential Ukraine peace deal. European leaders, alongside Ukrainian President Volodymyr Zelenskyy and UK Prime Minister Keir Starmer, have agreed to draft a structured peace plan to be presented to the United States (US).

However, the upside of the EUR/USD pair could be limited amid increasing risk aversion as the White House confirmed that US President Donald Trump signed an order raising tariffs on Chinese imports to 20%. Notably, Trump has yet to finalize similar orders for Mexico and Canada.

A statement from the Canadian Prime Minister's Office confirmed that Canada will impose retaliatory tariffs on US imports starting Tuesday if US tariffs take effect. Initially, Canada will apply a 25% tariff on US imports valued at C$30 billion.

Meanwhile, China’s Commerce Ministry announced early Tuesday that it would take "necessary countermeasures" to protect the country’s legitimate rights and interests. The ministry reaffirmed its strong opposition to the US decision to impose an additional 10% tariff on Chinese imports beginning Tuesday.

According to Bloomberg, citing a defense official on Monday, the United States has halted all ongoing military aid to Ukraine. The decision reportedly comes under orders from President Trump, with Defense Secretary Pete Hegseth directed to implement the pause. As a result, all US military equipment that has not yet reached Ukraine—including weapons in transit via aircraft and ships, as well as those waiting in transit zones in Poland—will be halted.

The Euro could face challenges ahead of the European Central Bank (ECB) meeting on Thursday, where policymakers are widely expected to cut the Deposit Facility Rate by 25 basis points (bps) to 2.5%. If confirmed, this would mark the ECB’s fifth consecutive rate cut, potentially weighing on the EUR.

Mixed US economic data has added to market uncertainty. The ISM Manufacturing PMI fell slightly to 50.3, missing expectations of 50.5 and down from January’s 50.9. However, S&P Global’s final Manufacturing PMI for February beat forecasts at 52.7, an improvement from its preliminary reading, signaling resilience in the US manufacturing sector.

(This story was corrected on March 4 at 02:30 GMT to say, in the headline, that risk aversion increases instead of risk sentiment improving.)

Euro FAQs

The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.