Above: Europe's steel and iron works were hit by a 25% U.S. import tariff at the start of the week. Image © Adobe Images
The Euro has more to gain than Pound Sterling on fading fears over tariffs.
The Pound-to-Euro exchange rate has dipped below 1.20 in a sign that foreign exchange markets are increasingly resilient in the face of Donald Trump's tariff threats.
Recovery by the Euro, Peso and Canadian Dollar seemingly defies the announcement of a universal 25% steel and aluminium tariff that will hit metal exporters such as the EU, Mexico and Canada.
"The law of diminishing returns seems to be in play as tariff-related headlines seem less provocative for the FX market," says Daragh Maher, head of FX strategy at HSBC.
In addition to the steel and aluminium import tariffs, Trump says further tariffs will be announced later in the week.
The Euro has proven highly sensitive to market fears that trade wars would dominate 2025, owing to the Eurozone's significant trade surplus in goods with the U.S.
However, those currencies that suffered the most are recovering now that markets sense Trump is unlikely to follow through with the worst of his threats:
"A continued difference between what Donald Trump says he will do, and what he actually does, could sap upward momentum later in the week and open some breathing room for trade-sensitive currencies like the euro, Canadian dollar, and Mexican peso," says Karl Schamotta, Chief Market Strategist at Corpay.
Last week, Trump was set to raise tariffs on all Mexican and Canadian imports by 25%, but ultimately shelved the plans.
The aluminium and steel import tariffs confirmed on Monday were supposed to be universal, but today we hear Australia has been excluded following a call between Trump and Australia's President Albanese.
What is clear is that there is ample scope for any country to avoid tariffs, provided its politicians show initiative, which is why the Euro is showing resilience.
Above: GBPEUR dips below the 1.20 line as global tariff fears wane.
This week, Trump will announce further tariffs on countries that already impose tariffs on U.S. imports. Analysts see limited risks for global financial markets, noting that this would most likely apply to emerging market countries like India.
Analysts also point out this is yet another curtailment of the universal tariff threat that Trump touted when campaigning for last year's election.
"The bigger news this week could be details on a plan for country-by-country reciprocal tariffs. If the administration pursues that strategy rather than a 10% universal tariff, then it could result in a smaller rise in the overall effective tariff rate than we have assumed," says Stephen Brown, Deputy Chief North America Economist at Capital Economics.
EU Tariffs Still Loom
Although the Euro is proving resilient, it is not ripping higher and won't do so as long as the threat of tariffs looms over the Eurozone.
Trump has yet to hit the EU, even if he has commented that the EU treats the U.S. "very badly" over trade.
This confirms that a tariff salvo is coming, but the EU is not a priority.
This gives EU politicians some breathing space to prepare a response that is expected to include threats of reciprocal tariffs and concessions.
Jean-Noel Barrot, the French foreign minister, also warns the EU should not hesitate to defend its interest, telling TF1 television that "the time has come" for the bloc to push the trigger on retaliatory measures.
Reports suggest the EU Commission is preparing for Trump's trade assault by offering concessions, such as a commitment to buy more U.S. gas and oil. This will allow negotiations to take place, as was the case with Mexico and Canada.
The Euro's recent resilience suggests markets think the strategy will work and that a worst-case outcome is now unlikely.