Synopsis:

The EUR/USD rally following the US tariff announcement may not have staying power, according to Credit Agricole. While markets reacted positively to lighter-than-feared EU tariffs and US growth concerns, the bank sees multiple headwinds limiting further EUR upside.

Key Points:

• EUR/USD rebounded after the US imposed a 20% tariff on EU goods, at the low end of expectations, fueling initial relief.

• Markets also responded to renewed US recession fears, with trade policy seen as potentially dragging down domestic demand.

• However, Credit Agricole expects any EUR strength to be short-lived due to:

  1. Expected EU retaliation, which could exacerbate cyclical risks for the Eurozone.

  2. Overstated US recession concerns—the bank sees room for positive US data surprises to shift sentiment.

  3. Overly dovish market pricing on the Fed, which may be recalibrated upward.

Conclusion:

While EUR/USD has benefited from a mix of relief and risk-off sentiment, Credit Agricole believes the rally lacks staying power. Retaliatory trade moves and a potential reassessment of the US macro outlook may soon reinvigorate USD support, capping EUR gains.