Trump serves up a huge opportunity for the EU by raising auto tariffs
The desk interprets President Trump's recent announcement to raise EU auto tariffs as a significant tactical error that could provide the EU with a strategic opportunity to reset trade negotiations. Per the full note from Adam Button, this unexpected move could prompt the EU to reconsider its previous concessions and seek a more favorable long-term deal. The potential for the EU to escalate its response is underscored by the recent political shifts within the European Commission, particularly the departure of Sabine Weyand, which may indicate a readiness to adopt a more assertive trade stance. As the market digests these developments, traders should remain vigilant about the implications for EUR/USD dynamics and broader trade relations.
What the desk is arguing
The desk frames Trump's tariff hike as a miscalculation that could backfire, offering the EU a chance to renegotiate terms that were previously seen as unfavorable. According to Adam Button, the EU's quick capitulation to earlier tariff pressures has now become a political liability, and this new tariff increase could serve as a catalyst for a more robust EU response.
The desk notes that the EU's potential to retaliate could lead to a significant shift in trade dynamics. With over 100 billion dollars being invested in U.S. auto manufacturing, the stakes are high, and the EU's ability to leverage this situation could reshape future negotiations.
Where it sits in our coverage
Our consensus target for EUR/USD is set at 1.075, with a range between 1.04 and 1.12. Notable firms contributing to this consensus include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan's target, which sits at the upper end of the range, indicating a bullish sentiment on the euro in light of potential trade negotiations.
How other firms see it
Firms like citi and jpmorgan are aligned with the desk's interpretation, suggesting a bullish outlook on the euro amid the shifting trade landscape. Conversely, bofa holds a contrary stance, advocating for a more cautious approach given the uncertainties surrounding the EU's response to U.S. tariffs.
Traders should monitor the EUR/USD trajectory closely, as it will likely reflect the evolving sentiment around these trade negotiations and the potential for retaliatory measures from the EU.
Key takeaways
- 01Trump's tariff increase could backfire, providing the EU with a chance to reset trade negotiations.
- 02The EU's previous concessions may now be reconsidered in light of the new tariff landscape.
- 03Political shifts within the EU, including leadership changes, may signal a readiness for a more aggressive trade stance.
- 04Market participants should remain vigilant about the implications for EUR/USD dynamics.
Market implications
Watch for potential volatility in EUR/USD as the market reacts to the EU's response to the tariff increase. A break above 1.075 could signal increased bullish sentiment, while any signs of EU retaliation could lead to a shift in positioning.
Trump announced that he's raising EU auto tariffs to 25% from 15% "next week" in a surprise move. "I am pleased to announce that, based on the fact the European Union is not complying with our fully agreed to Trade Deal, next week I will be increasing Tariffs charged to the European Union for Cars and Trucks coming into the United States. The Tariff will be increased to 25%. It is fully understood and agreed that, if they produce Cars and Trucks in U.S.A.
Plants, there will be NO TARIFF. Many Automobile and Truck Plants are currently under construction, with over 100 Billion Dollars being invested, A RECORD in the History of Car and Truck Manufacturing. These Plants, staffed with American Workers, will be opening soon — There has never been anything like what is happening in America today!
Thank you for your attention to this matter. President DONALD J. TRUMP" This could turn out to be a big tactical mistake and an opportunity for the EU if it embraces it.
The big surprise to me last year was how quickly the EU folded under tariff pressure for the US. It was the one part of the world with the economic clout and size to fight back against tariffs but it utterly folded. That's turned into a political liability.
Just this week, Sabine Weyand, the Director-General for Trade at the European Commission was shuffled out of her position. The deal was called the "Turnberry Deal" (or the EU–US tariff framework) and she Weyand famously described the process as a strategic "stabilization" effort. As we can see, it hasn't led to any kind of stabiliization or predictability.
She also said it was done to preserve NATO and US help in Ukraine but both of those are in dire straits as well. It's also no surprise that this moves came after German Chancellor Merz struck a chord with Trump saying: “An entire nation is being humiliated by the Iranian leadership, especially by these so-called Revolutionary Guards. And so I hope that this ends as quickly as possible" Since then Trump has been lambasting him and now we get this.
I have to wonder if this is exactly what Merz wanted. So what's the opportunity here? The EU can take this as a reset.
They have a new negotiator and Trump is proving that deals with him are worthless. Canada's Mark Carney said this week that some countries were regretting making deals. "A lot of countries rushed into deals with the US. They weren’t really worth the paper they were written on," Carney said in an interview.
Surely one of those places is the EU and Trump just gave them an opportunity for a re-do. It would take some pain but if the EU decides to escalate now, they're likely to get a better long run deal, or at least establish some credibility. Update: Brad Setser who is a really good source on international trade is now making the exact same point: Gives the EU an excuse to tear up Turnberry deal and retaliate in a world where Trump lacks the ability to use IEEPA to raise tariffs on everything overnight.
The 301 case against the EU's overcapacity was rather thin ... The auto tariffs are under a separate 232 (which I guess gives the President flexibility to change the remedy w/o notice and comment) And not yet clear if Europe has the stomach for a new trade war/ renegotiation of the deal. But the EU has the option to relitigate That's a fresh risk to keep on your radar.
This article was written by Adam Button at investinglive.com.
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