Why has the Euro been falling continuously? Tariffs and central bank policies exerting dual pressure

Against the backdrop of increasing global economic uncertainty, the euro exchange rate faces sustained downward pressure. The EUR/USD has recently been declining steadily, with many analysts and investment institutions warning investors to exercise caution regarding euro positions. What underlying factors are driving this wave of euro depreciation?

Trading Sentiment and Tariff Uncertainty Fuel Euro Decline

The euro’s renewed decline is mainly driven by two factors. First, market optimism about Germany’s fiscal stimulus measures has waned, leading investors to reassess Europe’s economic outlook and diminishing the previous buying momentum fueled by stimulus policies. Second, uncertainty surrounding U.S. trade policies has resurfaced, especially concerns over potential tariffs that could have tangible impacts.

According to the European Central Bank (ECB), if the U.S. imposes a 25% tariff on European imports, the eurozone’s economic growth could decrease by about 0.3 percentage points in the first year. This is not just speculation—tariff policies threaten Europe’s manufacturing and export sectors directly, indirectly weakening the ECB’s economic support.

Technicals Near Key Support Levels, Future Direction Under Scrutiny

From the charts, EUR/USD is approaching a critical technical support level. Analysts suggest that if the euro falls below 1.075, it could trigger further downside, with the next targets possibly at 1.07 or even 1.06. Conversely, if the exchange rate stays above the 21-day moving average, a rebound could be on the horizon.

Market focus is currently on this support line—it will determine whether the euro sinks deeper into depreciation or finds a footing to rebound.

Diverging Central Bank Policies as a Key Variable, Major Contrasts in U.S. and Europe Expectations

The fundamental driver of the euro’s movement depends on the differing policy expectations of the U.S. Federal Reserve and the European Central Bank. Market expectations for multiple rate cuts by the Fed have been revised down from three to two, indicating a potential prolongation of the dollar’s rate hike cycle. In contrast, expectations for ECB rate cuts are increasing.

ECB Governing Council member Villeroy de Galhau stated that the current 2.5% deposit rate could fall to 2% by late summer. Market data shows that the rate cut priced in for June has been fully reflected, with a 65% probability of a cut in April, and more easing measures could be expected from September to December.

What does this policy divergence imply? The widening interest rate gap between the U.S. and Europe could continue to grow, making the dollar more attractive relative to the euro, which in turn exerts long-term pressure on the euro exchange rate.

Tariff Developments Dictate Short-Term Euro Trends; Negotiation Space Remains

In the short term, whether the euro can rebound depends on the final implementation of U.S. tariff policies. If tariffs are imposed at levels exceeding market expectations, it will further depress the euro. Conversely, if actual tariffs are weaker than anticipated, room for negotiation remains, providing tangible support for the euro.

How Investors Should Respond to Euro Movements

Faced with this situation, Morgan Stanley offers a clear recommendation: adopt a cautious approach ahead of key policy announcements, consider reducing long euro and pound positions to avoid potential risks. This reflects market prudence—protecting capital before policy clarity is often more important than chasing rebounds.

Overall, the persistent decline of the euro is fundamentally driven by the dual pressures of tariff impacts and central bank policy divergence. The market is re-pricing the euro’s relative value under these influences. Investors should closely monitor upcoming policy developments and technical breakouts to identify clearer trading opportunities.