Trump answers journalist questions in the White House. Image: White House Official.
The Euro's impressive rally appears to have run its course for now.
U.S. President Donald Trump upped the ante and threatened to respond to the European Union's midweek tariff announcement with more tariffs.
This raises uncertainty for the EU and will limit the Euro's rebound potential in he near-term.
"Of course I’m going to respond," U.S. Donald Trump said Wednesday, threatening to escalate the tariff war.
"The problem is our country didn't respond. Look, the EU was set up in order to take advantage of the United States," he told reporters in the White House.
When asked if he would consider placing tariffs on European cars, he responded, "oh absolutely... They have millions of cars coming in."
"EURUSD fell from a five-month high back below 1.0900 after the European Commission launched countermeasures against US tariffs on EU steel and aluminium and Trump in turn said he would retaliate further, though not citing specifics," says Saxo Bank
For now, Euro weakness is limited, and it still holds significant gains that followed the unexpected announcement by Germany last week to boost spending.
A broad-based decline in the U.S. Dollar has also bolstered the European currency.
U.S. tariffs on EU steel and aluminium came into effect on Wednesday, prompting a tit-for-tat tariff announcement from the EU, which fired the starting gun on a trade war.
Trump's subsequent comments suggest that escalating retaliatory threats await.
Analysts say tariffs remain a notable source of uncertainty for European businesses, as well as policy makers at the European Central Bank, which can constrain the Euro's recovery.
"While downside risks for the EUR and euro-zone economy have diminished, they have not completely gone away," says Lee Hardman, currency analyst at MUFG Bank Ltd.
"Tariffs are a massive near-term risk," says Bill Diviney, an economist at ABN AMRO.
Above: EUR/USD and GBP/EUR (bottom) at daily intervals.
The Pound-to-Euro recovered to 1.1892 on Wednesday following the tariff escalation, having fallen as low as 1.1836 on Tuesday.
The Euro-to-Dollar peaked at 1.0946 on Tuesday and has since pared gains to 1.0873.
The EU announced tariffs worth $28BN on U.S. goods, saying the move was a countermeasure to the €26BN tariff on EU imports announced by the U.S. last month.
Canada, China and the EU have shown a willingness to respond to Trump's moves with counter-tariffs, while other nations are opting to take a slower approach, hoping to negotiate better outcomes.
South Korea, Taiwan, Japan and Australia held off on immediate retaliation to Trump's metal tariffs.
The UK said it would focus on "rapidly negotiating a wider economic agreement."
Brazil also wants to negotiate before considering retaliatory measures, and Mexico said it would wait until further U.S. tariffs are announced after April 2 to respond.
Weakness in the Euro looks relatively contained for now, and we are inclined to see recent price action as a correction of the recent EU-phoria surrounding Germany's fiscal expansion plans.
"After its best week since March 2009, EUR/USD’s momentum looks to be waning given the pair now sits in the overbought zone on the daily chart. Still, a high of $1.0875 today is almost five cents greater than where it was trading this time last week. We may be in for a short period of consolidation before another leg higher," says George Vessey, Lead FX & Macro Strategist at Convera.
The next leg of the Euro's rally would probably require greater clarity around tariffs, which would only be forthcoming in April when Trump announces a significant tariff regime.