EUR/USD fell sharply on its way to a 2-session low Tuesday after U.S. President-elect Donald Trump pledged to impose tariffs on Mexico, Canada and China but then turned positive as investors focused on interest rate differentials and hopes that Europe would avoid similar trade sanctions.

German Economy Minister Robert Habeck said Tuesday Trump's tariff announcement should be taken seriously and talks to avert a trade war need to be sought.

Such an approach, if markets expected it to yield results, could diminish economic and trade uncertainty for the euro area, alleviating some bearish pressure on the euro.

Tighter rate differentials helped to underpin EUR/USD and further tightening may severely squeeze EUR/USD shorts as the dollar's yield advantage over the euro dwindles.

German-U.S.
2-year yield spread US2DE2=RR tightening is threatening resistance near -220bps.

Fed SRAZ26 and ECB FEIZ5 terminal rate differentials are tightening, leaving resistance near -188bps close to breaking.

Further tightening could help EUR/USD rally through resistance near the psychological 1.0600 level, which could trigger stop buying.

October durable goods, PCE and personal income and consumption as well as weekly jobless claims and second-estimate Q3 GDP are due Wednesday and may determine if spreads tighten further.

Data indicating slower U.S. economic and job growth and tamer inflation could tighten spreads and rally EUR/USD.

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