EUR/CAD steadies around 1.4900, upside appears due to Trump tariff threats on Canada
- EUR/CAD could continue its winning streak as Trump announced to proceed with tariffs on Canada and Mexico.
- The Euro may face challenges as the absence of a clear majority for any single party threatens to stall growth in the Eurozone economy.
- European Central Bank officials remain supportive of a gradual policy easing approach.
EUR/CAD remains steady after registering gains in the previous four consecutive sessions, trading around 1.4920 during the Asian hours on Tuesday. The currency cross could further gain ground as the Canadian Dollar (CAD) faces challenges amid a downbeat market sentiment following US President Donald Trump’s announcement to proceed with tariffs on Canada and Mexico.
Late Monday, President Trump stated that sweeping US tariffs on imports from Canada and Mexico “will go forward” when the month-long delay on their implementation ends next week. He claimed that the United States (US) has “been taken advantage of” by foreign nations and reiterated his plan to impose so-called reciprocal tariffs.
However, uncertainty remained as Canada and Mexico intensified negotiations to avoid 25% tariffs on exports to the US, striving to persuade President Trump’s administration that their strengthened border security and fentanyl trafficking measures are effective ahead of the March 4 deadline.
The EUR/CAD cross faces downside risks amid weakness in the Euro (EUR) following the German federal election, where the lack of a clear majority by any single party threatens to hinder growth in an already fragile economy.
Friedrich Merz, leader of the Christian Democratic Union of Germany (CDU), is set to become the German Chancellor after securing the majority of votes. However, he is expected to encounter numerous challenges, including complex negotiations to form a coalition government.
The broader outlook for the Euro remains weak as European Central Bank (ECB) officials continue to favor a steady policy easing cycle. ECB policymaker Pierre Wunsch told the Financial Times that while he isn’t pushing for an April pause, rate cuts shouldn’t occur automatically without careful consideration. Additionally, ECB’s Francois Villeroy de Galhau suggested the ECB could lower its deposit rate to 2% by summer, according to Reuters.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.