No Tariffs, No Parity in EUR/USD? The major currency pair has dropped back to its previous level after the White House imposed import duties. However, a reprieve for Mexico and Canada, along with expectations that a similar situation might arise for China, has led to a retreat of the US dollar against other major currencies. Is Donald Trump's protectionism not worth much after all?

Forewarned is forearmed. Europe prepared for US tariffs following the Republican comments indicating their imminent arrival. With the US trade deficit with the EU being significant, concessions were proposed, including increased purchases of liquefied natural gas, fertilizers, and weapons, as well as stronger export controls on China, investment screening, and collaboration with Washington to address excess capacity in the steel sector.

If these measures do not satisfy Donald Trump, Brussels will follow established protocols from 2018, introducing tariffs against politically sensitive American states. As a result, the European Union was gearing up for a trade war, but the news of the deferred tariffs against Mexico and Canada has made it clear that reaching an agreement with the White House is still possible.

US and European Foreign Trade

Investors approach the EUR/USD currency pair with similar considerations. Despite the absence of import duties, it might seem that this pair should decline due to the differing monetary policies of the Federal Reserve and the European Central Bank, along with the concept of American exceptionalism. However, the US dollar is currently overvalued, which, coupled with a lack of new developments, has led to a decline in the USD index.

According to Credit Agricole, the question of parity in EUR/USD is still relevant. The divergence in monetary policy is not as significant as it was in 2018-2019. Increased costs related to deficits, government debt, and borrowing may diminish the attractiveness of the US dollar. Additionally, the closure of carry trade operations, prompted by a decline in global risk appetite, is likely to boost the demand for the Japanese yen and Swiss franc, resulting in a retreat from the American currency.

I would not be overly optimistic about the euro. Donald Trump has made a serious decision to restructure the international trade system, bringing production back to the United States. His goals include increasing revenue and balancing trade. As a result, we can expect tariffs, which will likely maintain the downward trend in the EUR/USD exchange rate. Additionally, news of these tariffs will unsettle the markets, similar to what happened in early February. In such uncertain conditions, investors typically seek safe havens, and the American dollar appears to be the best option.

From a technical perspective, on the daily chart of EUR/USD, the "bulls" are attempting to push the quotes beyond the fair value range of 1.024-1.0415. If they succeed, the risks of a corrective movement toward the downward trend will increase. In this scenario, it may make sense to increase long positions on the euro, particularly if it forms around $1.035. Conversely, a rebound from the resistance level at 1.0415, followed by a drop in the pair below the moving averages, would warrant short positions.