A Dangerous Game

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The macro point

Everyone keeps talking about customs duties. This creates volatility, including on the EUR/USD. But it's certainly more the yield differential between American assets and European assets that explains the downward trend of the EUR/USD. This will be THE most important factor to consider in the coming weeks, in our opinion. It's a double-edged sword. The new American tariff policy will either cause limited macroeconomic effects if trade agreements are subsequently negotiated with the countries targeted by American measures, or a recession if negotiations fail. In the Canadian case, what is interesting is that Donald Trump decided to impose only a 10% tax on oil. The United States has significant strategic energy reserves that have increased in recent years. If Trump wanted to push the Canadian economy into recession, he could have easily done so by deciding on much higher tariffs on energy. In our view, the American administration's goal is to create more jobs in the United States by forcing companies based in Canada to relocate their activities across the border – which is quite easy, in theory. We remain convinced that American protectionism is mainly a negotiating tactic until an agreement is found – as was the case with Colombia recently on the issue of illegal migrants. Of course, failure is always possible. It would then be very inflationary, bad for growth and for large exporting companies. China's response to the 10% tariffs decided by Washington is interesting. It shows that no one really wants the situation to escalate. Beijing has opened an investigation against Google, which has not operated in the country since 2010. Furthermore, soybeans, which were the first import from the United States to China in 2023, are not directly targeted by retaliatory measures. The yuan, which is often an adjustment variable of Chinese policy, has not shown worrying signs of weakening. It seems that all players in this trade war want to avoid the worst-case scenario. Finally, Europe is also preparing for a complicated showdown. It's a matter of weeks. Donald Trump has asked the European Union to offset the American deficit of 214 billion dollars by buying oil and gas. Is it feasible? Yes, but there are two obstacles. On the American side, port infrastructure does not have sufficient capacity to respond to a strong increase in hydrocarbon exports. However, the investments planned in the coming years could increase liquefied natural gas imports from 50% to 70-75%. The capacity of European refineries to process American crude oil, which is too light, is the other obstacle. That's why we buy less than 25% of our oil from across the Atlantic. But, in both cases, it's all a question of investment, political will... and time. It's certainly not in 2025 that American hydrocarbons will flood the European market. But it's realistic for late 2026-early 2027. In the end, we know that Europeans will certainly have no choice but to bow down. We remain convinced that we are not heading back to the 1930s, when protectionism led to poverty, hyperinflation, and paved the way for totalitarianism. This comparison, often highlighted currently, is incorrect. As proof, the American approach remains measured. We are not facing an all-out trade war. We estimate that only 5% of the American GDP is directly targeted by protectionist measures decided against Mexico, Canada, and China. It remains ultimately quite marginal and rather painless from a macroeconomic point of view. Moreover, it is certainly insufficient to sustainably drive up inflation.

Technical point

The foreign exchange market is obviously very focused on tariffs. This is not surprising. It creates volatility across all market segments. But there's certainly a more important factor than protectionism to explain the EUR/USD's evolution: the yield gap. This gap continues to widen between US Treasury bonds and German Bunds, exerting downward pressure on the euro. The market has perfectly understood that the Federal Reserve (Fed) will lower its rates less than the European Central Bank (ECB), which impacts bond yields. Unsurprisingly, investors tend to favor assets that offer higher returns, so if US Treasury bonds yield much more than German Bunds, it could lead to new capital flows towards the US dollar, weakening the euro. This is certainly one of the key trends to watch in the foreign exchange market in the coming weeks. The supports and resistances displayed below indicate the weekly low and high points within which rates should evolve during the week.

	Weekly Support		Weekly Resistance
	S2	S1	R1	R2
EUR/USD	1.0288	1.0309	1.0450	1.0466
EUR/GBP	0.8245	0.8291	0.8418	0.8440
EUR/CHF	0.9290	0.9300	0.9459	0.9490
EUR/CAD	1.4777	1.4809	1.5002	1.5090
EUR/JPY	157.22	157.10	160.11	160.55

Announcements to follow

This week will still be driven by trade tensions. We need to get used to it. It's a new parameter that will be inherent to the market for at least the next four years. On the macroeconomic front, the week is rather calm. US inflation in January will be the main statistic to monitor. It should still remain at a high level, close to 2.9% year-on-year. It’s becoming complicated for the Fed. The price levels are too high to lower rates but, at the same time, the US job market would need a rate cut to restart. We will need to wait for new statistics to know what room the Fed will have to continue its easing cycle. Below you will find the publications and events that are expected to have a major impact on currency rate developments.

Day	Time	Country	Indicator	What to expect?
02/12/2025	14:30	USA	Consumer prices (January)	Previous at 2.9% year-on-year
02/13/2025	14:30	USA	Producer prices (January)	Previous at 0.2% month-on-month