Synopsis:

While Trump’s tariff threats against the EU are seen as an opening gambit for negotiations, the risk of escalation remains. Credit Agricole argues that many trade-related negatives are already priced into EUR/USD, and relative fundamentals could gain more importance in the near term.

Key Points:

1. Trump’s Tariff Threats Against the EU

   • The US has singled out the EU as a potential next target for tariffs after Canada, Mexico, and China.
   • European leaders have signaled willingness to negotiate but have also promised retaliation if tariffs are imposed.
   • Markets may discount Trump’s threats as a negotiation tactic, but risks remain.

2. Trade War Fears Already Priced In

   • Given recent market reactions, Trump-related EUR negatives may already be largely reflected in EUR/USD levels.
   • The EUR has been under pressure amid trade concerns, weakening economic data, and ECB easing expectations.

3. Shift Toward Fundamental Drivers

   • With much of the trade risk priced in, relative EUR-USD fundamentals may take over as the primary FX driver in the near term.
   • Factors such as ECB policy divergence with the Fed, Eurozone growth, and US inflation outlook could become more critical.

Conclusion:

Credit Agricole sees EUR/USD downside risks from trade tensions as largely priced in but warns that relative fundamentals will now play a bigger role in driving the pair. The ECB’s stance, EU economic data, and Fed policy expectations will likely dictate the next move in EUR/USD.