EURUSD surged on Trumpcession and US hegemony; what’s next?

·       Trump may sound less hawkish on China tariffs in the coming days as a lack of supply from China may result in acute supply shock for the US economy.

·       US-China formal trade talks would be positive for USD and negative for EURUSD in the coming days.

·       Trump may not agree with the EU’s proposal for zero-for-zero tariffs; Trump may impose 20% tariffs on all EU goods in general with some exceptions.

·       The US is the EU’s biggest export destination; Trump also targeting the EU’s VAT and various alleged non-tariff barriers.

EURUSD surged over 9% since January’2025 on Trump’s bellicose tariff policies and the concern of Trumpcession. Trump’s tariff policy uncertainty, and planned higher tariffs of 10% universal basic tariffs, 145% Chinese tariffs on 15% of imports and various sectoral tariffs may eventually result in around 27.5% weighted average tariffs against 2.5% earlier. Trump’s higher tariffs, if implemented at face value will inevitably result in a higher cost of living ($1400-$4300 per head to small household/year), higher inflation, lower discretionary consumer spending, lower private capex/business investment, higher unemployment and stagflation or even an all-out economic recession (Trumpcession). Earlier, the market was expecting moderate or less hawkish Trump trade war policies.

Thus USD was under pressure and EUR surged against USD despite dovish cuts by ECB in the last few quarters to fight the Trump trade war by inducing EUR devaluation. Also, Trump’s tariff policy uncertainty and 24/7 bullying of Fed/Chair Powell to cut rates are affecting the US Fed (institution) credibility and trust. Thus UST (US Bonds) are now losing the haven appeal. , along with increasing US dollar hegemony, especially after the Russia-Ukraine war broke out-various central banks like PBOC (China), RBI (India) and even BOJ (Japan) are now steadily diversifying from US in assets like USTs to Gold, German Bonds, Japanese and even Indian bonds.

Overall, EURUSD surged from a 1.0343 low in Dec’24 to 1.1574 in April’25 driven by a combination of factors including Trump trade war policies, and macroeconomic dynamics despite consecutive ECB rate cuts, and the ECB sounded much more dovish than the Fed.

·       Trump trade/tariff war policies and the concern of Trumpcession

·       Trump’s attack on Fed Chair Powell affected US institutional credibility and trust

·       The reduced appeal of a haven for the UST and the increasing appeal of German bond

·       German fiscal stimulus and EU higher defense spending (NATO)

·       No widespread trade war strategy against the US by the EU

·       Although the EU planned reciprocal tariffs against the US, till now not been implemented for the sake of a trade deal

·       Improving trade and diplomatic relations with China, the 3rd largest export destination of the EU, followed by the US and UK

Trade dynamics between US and EU and EZ (EA/Euro Area) and potential effect on EURUSD

The trade relationship between the US and the EU is the world’s largest, with goods and services trade reaching nearly $1.6 trillion in 2024 with an average of $1.4 trillion in the last 6 years (2018-24).

The trade balance between the US and the EU from 2018 to 2025, as estimated by the US BEA, reflects a consistent US trade deficit, with the EU maintaining a surplus in goods trade and the US typically holding a surplus in services trade.  Overall, the US trade deficit with the EU reached around $318 billion in 2024 from almost $90 billion in 2018, averaging $150 billion per year in the last six years (2018-25).

The US-EU trade dynamics are heavily shifted by EU dominance in goods (pharmaceuticals, vehicles, machinery) and a decreasing services balance favoring the EU since 2023. The US trade deficit has grown due to strong EU exports into the US amid comparatively lower tariffs, and US consumer preferences for value for money (cheaper, but branded), while US exports are facing various stringent EU regulations, and EU’s macroeconomic imbalances including subdued discretionary consumer spending.

If we consider only EZ/EA (Euro Area), the average US trade deficit was around $98 billion between 2018—24, and by 2025, it’s projected around $50 billion. EU/EZ has reportedly proposed to buy US LNG for around $50 billion to neutralize the trade surplus issue with the US/Trump for getting a fair/favorable trade deal.

EU-US trade: Key Sectors (2024)

EU Goods exports to the US

·       Pharmaceuticals: $127.0 billion (21% of total imports), led by Ireland and Germany

·       Machinery/Mechanical Appliances: $89.8 billion (14.8%), including industrial equipment

·       Automobiles/Vehicles (Non-Railway): $60.3 billion (10%), primarily German cars (22% of EU vehicle exports)

·       Electrical Equipment: $39.3 billion (6.5%).

·       Optical/Photographic Equipment: $36.9 billion (6.1%).

·       Top EU Exporters: Germany (23% of EU exports), Ireland (30% of exports), and Italy

EU service exports to the US

·       Financial and Business Services: Strong growth, especially from Ireland and the Netherlands

·       Travel Services: Significant, driven by EU tourism (US travelers into EU)

·       Tech-Related Services: Increasing due to EU digital regulations

US Goods Exports to the EU

·       Petroleum Products (Fossil fuel): 16.1% of total exports, driven by LNG (46% of EU LNG imports) and crude oil

·       Natural Gas: $20.6 billion (5.8%), boosted by the EU’s shift from Russian gas

·       Pharmaceuticals: $49.0 billion (13.8%), reflecting integrated supply chains

·       Transport Equipment: $19.6 billion (5.5%), including aircraft (e.g., Boeing)

·       Aerospace Products: Leading export from 15 US states (e.g., Boeing aircraft, Lockheed Martin F-16 parts)

·       Optical/Photographic Equipment: $30.8 billion (8.3%)

US Service Exports to EU:

·       Financial Services: Major component, driven by US banks and insurance firms

·       Intellectual Property Charges: Significant due to US tech giants (e.g., licensing fees).

·       IT Services: Led by companies like Microsoft, and Google.

·       Travel and Business Services: Growing but less dominant

Reasons for Increasing US Trade Deficit with EU

Strong EU Goods Exports

·       EU exports to the US grew 44% from 2018–2024, driven by high-demand products like pharmaceuticals ($127 billion in 2024) and vehicles ($60.3 billion)

·       Germany and Ireland dominate, with Germany’s car exports and Ireland’s pharmaceuticals leveraging integrated supply chains

·       US consumers prefer EU products (e.g., German cars, Irish drugs) due to perceived quality and specialization (strong brand names)

US Export Constraints:

·       US exports to the EU grew only 11% (2018–2024), limited by EU regulations like sanitary/phytosanitary standards (SPS) and geographical indications (GIs) restricting US agricultural products (e.g., meat, dairy)

·       EU’s 10% tariff on cars (vs. US’s 2.5%) and higher tariffs on food/beverages (3.5% above US) limit US competitiveness

·       Non-tariff barriers (e.g., EU’s packaging waste, deforestation rules, Digital Markets Act) hamper US exports

EU’s Emerging Services Surplus

·       Since 2023, the EU has flipped the services trade balance, with a $103.0 billion surplus in 2024, driven by financial, business, and tech services from Ireland and the Netherlands

·       US tech giants face EU digital taxes and regulations, increasing EU services imports

Macroeconomic Factors:

·       Consumer Behavior: US consumers favor EU goods like luxury vehicles, and pharmaceuticals, while EU consumers prefer domestic products due to quality and regulatory alignment

·       Low US Savings Rate: The US’s low savings rate and high consumption drive imports, increasing the deficit.

·       EURUSD Exchange Rate: Steady devaluation in EUR against USD makes EU goods more competitive in the US; EURUSD devalued from around 1.50 in 2010 to almost parity 1.00 in late 2022; now trading around 1.13 after making a recent low around 1.01 in early 2025 on moderate Trump trade war policy anticipation

The EU is the top global (EU member states + Ex. EU) exporter, with goods exports of $2.8 trillion and services exports of ~$1.3 trillion in 2024, totaling ~$4.1 trillion. The US is the EU’s largest export market, followed by the UK and China. The US is the world’s second-largest exporter, with goods exports of $2.06 trillion and services exports of ~$926 billion in 2024, totaling ~$2.986 trillion, led by EU, Canada, Mexico, China, UK and Japan.

China is the world’s 2nd largest exporter, with goods exports of ~$3.125 trillion and services exports of ~$400 billion in 2024, totaling ~$3.525 trillion. The US and EU are key export markets for China, but emerging markets are growing led by HK, Japan, South Korea, Vietnam, India, Russia, Singapore, and Australia. China is the world’s largest merchandise (goods) exporter.

Overall, the EU is an export-heavy economy; almost 22% of GDP comes from exports against 12% USA and 19% from China. Goods exports alone (~15% of GDP) underscore the EU’s reliance on manufacturing and trade, particularly in countries like Germany, Ireland, Netherlands, France and Italy. China’s merchandise exports also constitute around 17% of its nominal GDP. The US is less export-dependent due to its large domestic market, low savings and focus on consumption-driven growth.

The US runs a persistent trade deficit ($1.2 trillion in 2024), unlike the EU or China trade surplus. China’s export model relies on low-cost production and emerging markets, contrasting with the EU’s high-value focus, but the difference is now narrowing. China’s growing presence in high-value sophisticated sectors (e.g., electric vehicles) challenges EU exporters. The EU’s regulatory burden (e.g., deforestation rules, Digital Markets Act) may deter some markets. China is now the biggest competitor of the EU in terms of merchandise exports and manufacturing hub. The US’s trade deficit reflects its role as a capital importer, driven by a favorable business environment and large internal market, not solely EU trade practices.

Why the EU is an Export-Heavy Economy

Economic Structure: The EU’s economy is built on open markets and trade liberalization, with a single market facilitating intra-EU trade and a customs union enabling collective trade negotiations. Export-led growth is a deliberate strategy, especially for Germany, which uses exports to drive industrial output and employment. EU/EUR was created as a common devalued currency to help the German economy.

Competitive Industries: The EU hosts global leaders in pharmaceuticals (e.g., Roche, Novartis), automotive (Volkswagen, BMW), and machinery (Siemens), which thrive on international demand (global brands). High-quality standards and innovation (e.g., Germany’s Industry 4.0) ensure competitiveness in global markets.

Geographic and Policy Advantages: Proximity to key markets like the UK, Switzerland, and Turkey facilitates trade; this includes even the US, on the other side of the Atlantic. The EU’s extensive trade agreements (e.g., with Japan, South Korea, and Canada) reduce barriers, boosting exports.

Global Supply Chains: The EU is deeply integrated into global value chains, particularly in the pharmaceuticals and automotive sectors, where components cross borders multiple times before final export. Ireland’s role as a pharmaceutical hub (30% of EU exports to the US) exemplifies this integration.

Historical Context: Post-World War II, Western European economies rebuilt through export-led industrialization, a model continued under the EU’s single market (1993) and euro adoption (1999). The EU’s trade surplus strategy counters domestic demand constraints in some member states.

Intra-EU Trade: Intra-EU trade (goods and services among member states) is significant, accounting for ~60% of total EU goods exports ($1.68 trillion of $2.8 trillion). This internal market amplifies the EU’s export orientation, as member states treat intra-EU trade as exports. Total Ex.  EU exports (goods + services) were around $1.8 trillion against China’s $3.5 trillion and the US’s $2.9 trillion; i.e. China is the top exporter in the world, followed by the US, if we do not consider intra-EU member states trade as export.

Fast forward, Trump often termed the EU a ‘mini-China’, but more harmful than China. China, the EU and virtually all other big US trading partners, having large trade deficits with the US are virtually ripping off the US for decades after decades. This includes both US allies and adversaries. Trump 2.0 has emphasized reducing the US trade deficit through tariffs, targeting the EU due to its $235.6 billion goods deficit in 2024.

On April 2, 2025: Trump signed Executive Order 14257, declaring a national emergency under the International Emergency Economic Powers Act (IEEPA), citing “large and persistent” US goods trade deficits ($1.2 trillion in 2024) as a threat to national security. Trump Argues deficits hollow out US manufacturing (5 million jobs lost, 1997–2024) and critical supply chains, citing vulnerabilities exposed during COVID. Trump focuses exclusively on goods deficits, ignoring services, aiming to boost US manufacturing and jobs.

Trump’s Tariff Policy on the EU

Tariff Structure:

·       20% Reciprocal Tariff Applied to all EU goods imports, effective April 9, 2025, but paused for 90 days till July 9, 2025, and reduced to 10% during negotiations

·       25% Tariffs: Imposed on EU steel, aluminum, cars, and auto parts, effective March 4 (steel/aluminum) and March 27 (cars)

Tariff Formula:

·       Trump’s reciprocal tariff rate is calculated as half the ratio of the US goods trade deficit to US imports (e.g., $235.6 billion ÷ $605.8 billion ≈ 39%, halved to ~20%)

·       Economists criticize this as arbitrary, not reflecting actual EU tariffs of 2.9% on weighted average (1.0%–4.8%) on most US goods.

·       Reciprocity: Claims EU tariffs (e.g., 10% on cars vs. US’s 2.5%) and non-tariff barriers (e.g., VAT, regulations) are non-reciprocal, costing US firms $200 billion annually in VAT alone

Trump’s Specific Targets on EU

·       Automotive Sector: 25% tariffs on EU cars aim to protect US automakers (e.g., GM, Ford), with an estimated $4,911 cost per vehicle for imported parts

·       Steel/Aluminum: 25% tariffs target EU exports (€3 billion steel, €2 billion aluminum) to bolster US producers

·       Agriculture: Trump claims EU blocks US farm products (e.g., meat, dairy) via targeted regulations, seeking greater market access

·       Energy Exports: Trump demanded EU buy $350 billion in US oil and gas to waive tariffs, despite US capacity and EU demand constraints

EU’s Counter-Strategy against Trump tariffs: The EU has adopted a multi-pronged strategy to counter Trump’s tariffs, balancing negotiation, retaliation, and diversification. The EU is also pointing out WTO Violations by the Trump admin as it argues Trump tariffs breach WTO rules, as the US’s 3.3% average MFN tariff is lower than the EU’s 5%, but actual weighted average applied tariffs are similar (3.95% US vs. 3.5% EU).

Negotiation and Concessions:

·       Zero-for-Zero Tariff Offer: On April 7, 2025, the EU proposed eliminating tariffs on industrial goods (e.g., cars, pharmaceuticals, machinery), mirroring the failed Transatlantic Trade and Investment Partnership (TTIP); EU’s average tariff on non-agricultural goods is 1.6%

·       Energy Purchases: EU President Ursula von der Leyen suggested increasing US LNG and oil imports to reduce the goods deficit, though US production limits constrain this

·       Dialogue: EU leaders emphasize cooperation, with von der Leyen pausing countermeasures for 90 days (April 10, 2025) to “give negotiations a chance”. Irish Minister Simon Harris and Germany’s Robert Habeck stress unity and dialogue

Retaliatory Tariffs

·       Approved Package: On April 9, 2025, the EU approved 25% counter-tariffs on €21 billion ($24.1 billion) of US goods (e.g., soybeans, copper, motorbikes, orange juice), effective April 15 but paused for negotiations

·       Targeted Goods: Selected to be easily sourced elsewhere and aimed at US red (Trump’s Republican) states to maximize political impact (mostly US agricultural states)

·       Escalation Threat: Von der Leyen warned of “EU trade bazooka measures” targeting US services surplus (e.g., digital taxes, restrictions on US tech firms) if talks fail by July 2025

Leveraging Strategic Dependencies

·       The EU relies on the US for only 8 of 122 strategically important products (e.g., beryllium for defense), while the US depends on 32 EU products (chemicals, pharmaceuticals)

·       EU could restrict chemical/pharma exports as leverage, though this risks US retaliation.

Diversifying Trade

·       The EU aims to expand trade agreements with non-US partners (e.g., Mercosur, Mexico, UK, Africa, Indo-Pacific) to reduce US reliance.

·       Concerns exist about redirecting Chinese goods hit by US tariffs into EU markets, prompting regulatory measures.

WTO and Allies

·       The EU is building a coalition with the UK, Japan, and others to counter US protectionism and reform WTO rules.

·       Plans to challenge US tariffs at the WTO, though Trump’s potential WTO withdrawal weakens this

Internal Resilience and Reform

·       The EU is urged to boost domestic demand and reduce export dependence to mitigate tariff impacts.

·       Industrial policies are proposed to counter “China Shock 2.0” and US tariffs, preventing a “Rust Belt upon the Rhine”.

Economic Impact of Trump trade war and EU mitigation effort

·       For the US: Higher tariffs may raise consumer prices (e.g., $4,239–$4,911 per vehicle) and fuel inflation, with limited deficit reduction due to structural factors.

·       For the EU: Germany and Ireland face the largest export losses (€161 billion and 30% of exports to the US, respectively), risking recession in export-led economies. Short-term consumer benefits (e.g., cheaper EU goods) are possible if unsold inventory grows.

·       Trade War Risks: Escalation could disrupt $975.9 billion in goods trade (2024) and harm integrated supply chains (e.g., pharmaceuticals). EU’s retaliatory measures may target US services, escalating tensions.

·       Export Trends: EU goods exports may grow modestly (2–3%) if US tariffs are paused or resolved via negotiations (e.g., EU’s “zero-for-zero” offer). Services exports could rise with digital trade agreements.

·       Risk Mitigation: The EU is diversifying to markets like India ($75.6 billion in 2024) and Japan ($122.0 billion), with new trade deals (e.g., Mercosur) to reduce US reliance

·       Trade Balance: The EU’s goods surplus with the US ($235.6 billion in 2024) may narrow slightly if tariffs reduce exports, but services deficits ($103 billion) could stabilize with stronger EU financial exports

Conclusions:

The EU is an export-heavy economy to some extent; if we exclude intra-EU trades as exports, the net trade outside the EU constitutes around 9.5% of nominal GDP against the US’s 11.6% and China’s 19.4%. The EU exports are driven by pharmaceuticals, machinery, vehicles, and services, and reflect a trade-oriented model bolstered by competitive industries, trade agreements, and global supply chain integration.

The EU’s nominal GDP grew at a CAGR of around 5.5% from 2000 to 2014, reflecting strong expansion and integration, but slowed to a CAGR of 1.5% from 2014 to 2024 due to debt crises, Brexit, and geopolitical challenges including lingering Ukraine and Gaza war. The EU may be the biggest loser of the Ukraine war due to over-dependence on imported fuels, foods and other commodities- especially on Russia, which has resulted in significantly higher energy costs and the manufacturing industry. Also, Chinese efficacy in EV and automobile manufacturing has affected Germany and other erstwhile manufacturing hubs in automobiles.

The Russia-Ukraine war has significantly impacted the EU economy, contributing to the low 0.7% average GDP growth in 2023-24 against the 1.5% pre-COVID average. Key effects include a $200–300 billion GDP loss in 2022, €175 billion in direct costs, 65% export declines to Russia, and inflation peaks (10.6% in 2022), driven by energy and food price shocks. CEE countries face disproportionate burdens, while Germany and Italy grapple with energy dependence. Although various fiscal and monetary stimulus mitigates impacts for the time being, it strains budgets and fiscal discipline.

In 2025, Trump tariffs and ongoing war costs may further affect the economy, though energy independence and Ukraine’s integration offer long-term potential. However, reliance on exports exposes the EU to risks like US tariffs, Chinese competition, and geopolitical shocks.

Although the EU is not an export-heavy economy, if we consider only real exports outside the EU, the US is the biggest trading partner, the top destination of EU exports and also one of the biggest sources of USD (trade surplus). Thus EU needs to keep Trump in a good mood for a favorable trade deal. But the question is whether Trump will relent or not as Trump is now more concerned about non-tariff barriers of the EU like VAT (sales taxes) and targeted regulations coupled with sectoral tariffs like on automobiles, metals, pharmaceuticals and various farm, food & dairy products to Make America Great Again, ensuring the so-called Golden Age.

Looking ahead, EURUSD may correct as:

·       China may start formal trade negotiations, which will be positive for the USD on the fading concern of an all-out US recession.

·       Trump may scale back his hawkish tariff policies and may sound moderate as his tariff/trade policy may cause an imminent supply-side shock for the US economy, followed by demand shock if implemented at face value.

·       ECB may cut 100 bps cumulatively in 2025 against Fed’s 50 bps

·       ECB always wants to devalue EUR to promote EU/EZ exports amid subdued domestic consumption

·       If Trump keeps even a 10% basic universal tariff for EU/EZ (vs 3.0% earlier), the ECB may try to devalue EURUSD proportionately for export

Bottom line

EUR is already a carry trade currency rather than a growth currency like USD. The EU economy is already suffering a stagflation-like scenario even before COVID and Trump trade war 2.0. Europe may now pay a big price for being too dependent on ‘all-weather ally’ America for almost everything from trade to defense. Trump is not in the mood to give any ‘undue’ concessions including the EU’s demand for zero-for-zero tariffs. Trump may keep a minimum of 10-20% tariffs on ‘mini-China’ EU. Thus ECB has to ensure steady devaluation of EURUSD for EU export competitiveness.

Technical Outlook: EURUSD

Looking ahead, whatever may be the Trump trade war and fundamental macro narrative, technically EURUSD (1.13800) has to sustain above 1.11900 for a recovery to 1.15800-1.16500 and only after sustaining above 1.16800-1.17000, it may further rally to 1.196000/1.20000-1.24500/1.25000 in the coming days; otherwise sustaining below 1.15800, EURUSD may again fall to 1.11900 and further fall to 1.10000/1.09700-1.07300/1.06000 in the coming days.