EUR/USD plunged more than 1% to near 1.0240 at the start of the week. The major currency pair plunged as US President Donald Trump reiterated his threat to impose tariffs on the European Union (EU). Over the weekend, Donald Trump imposed 25% tariffs on Canada and Mexico and 10% on China. Trump also warned that he would also increase levies on the trading bloc, but he did not provide much information.

"That will definitely happen with the European Union. I can tell you that because they have really taken advantage of us," Trump said. He also accused the old continent of not buying enough US cars and farm products. Trump added that the EU "takes almost nothing and we take everything from them".

Tariffs on the Eurozone would accelerate its problems. The common currency bloc is already facing the risk of a slowdown. Eurozone preliminary gross domestic product (GDP) data for the fourth quarter of 2024 showed that the economy was flat after growing 0.4% in the third quarter. The shrinking German economy remains the weak link in the eurozone's flat GDP growth. German GDP data showed that the economy contracted by 0.2% year-on-year in the final quarter of 2024.

Further signs of weakness in the eurozone economy could force the European Central Bank (ECB) to continue lowering interest rates. The ECB cut its Deposit Facility rate by 25 basis points (bps) to 2.75% on Thursday and signaled that the path of monetary policy is clear: expansionary. Traders have fully priced in three rate cuts and see them coming by the summer as ECB officials are confident that inflation will return sustainably to the desired level of 2% this year.

On Monday, the Harmonized Index of Consumer Prices (HICP) report for January showed that price pressures eased on a monthly basis. The core Consumer Price Index (CPI) – which excludes volatile food and energy prices – deflated by 1% after growing 0.5% in December. In the same period, the headline CPI also deflated by 0.4%. On a year-on-year basis, the headline CPI rose steadily by 2.7%, faster than the estimate of 2.6%. The core CPI is expected to rise by 2.5%, faster than the expectation of 2.4%.

Source: FXstreet