Tariff risk mitigation, the euro is expected to achieve its best performance in a year this week

According to the Zhitong Finance APP, the euro is expected to achieve its best weekly performance in over a year as investors lower their expectations for interest rate cuts and bet that U.S. trade tariffs will not take effect as quickly as previously feared. The euro is set to rise about 2% this week to $1.0515, marking its largest increase since July 2023. This trend is partly due to the weakening of the dollar, which is experiencing its worst week against a basket of major currencies in 14 months. The euro's rise this week also marks its recovery from a slump since September, when the market was generally concerned that Donald Trump would impose tariffs on Europe after taking office in January. However, the new U.S. president is currently focusing on Mexico and Canada, although punitive measures against Europe may still be taken in the future. Roberto Cobo Garcia, head of G10 FX strategy at BBVA, stated, "Trump's immediate decision not to impose tariffs on Europe or other trading partners has somewhat reversed the bearish trend for the euro." He expects the euro to continue to rebound in the short term and points out that the European Central Bank's valuations, technicals, positioning, and market pricing all indicate that euro short positions are "somewhat excessive." On Friday, stronger-than-expected German PMI data further boosted the euro, pushing the two-year German bond yield to its highest level in a week and prompting traders to reduce bets on interest rate cuts. Currently, the market expects the European Central Bank to ease monetary policy by about 90 basis points this year, up from 86 basis points on Thursday. However, data from the Commodity Futures Trading Commission (CFTC) shows that due to concerns that trade restrictions could exacerbate the economic slowdown in the eurozone, leading to further interest rate cuts, hedge funds and other speculators have raised their bearish bets on the euro to the highest level in nearly three years. Roberto Cobo Garcia also noted that if the euro continues to close positions, its exchange rate against the dollar could rise to $1.0630, a level that was broken in early December and is seen as a key resistance point. George Saravelos, global head of FX research at Deutsche Bank, stated that without tariff risks, the euro-to-dollar exchange rate could approach $1.06. However, movements in the options market indicate that this week's rebound in the euro is not due to a shift in market sentiment, but rather a rebalancing of euro short positions. The so-called risk reversal indicator (a barometer of market sentiment) has not followed the trend of euro spot prices, indicating that traders still prefer to hold bullish positions in the dollar rather than the euro. Insight Investment warns that once Trump follows through on his threat to impose tariffs on European imports, the euro could "drop significantly," and cautions the market not to underestimate tariff risks. The company also points out that ongoing concerns about the eurozone economy and increased volatility in the currency markets may limit the euro's rebound potential in the short term Francesca Fornasari, Head of Currency Solutions at Insight, stated: "If the dollar long positions are cleared in the coming weeks and the euro to dollar exchange rate falls to 1.05, then our inclination will be to sell euros rather than buy them."