Trade War Fears Bolster ECB Dovish Bias

Summary

• EURUSD trades cautiously near 1.1350, reflecting both ECB dovishness and ongoing trade policy uncertainty.
• Support Levels:
  • 1.1300 – key psychological and technical support
  • 1.1260 – March low
• Resistance Levels:
  • 1.1380 – near-term resistance
  • 1.1425 – early April highs

The Euro remains under pressure amid heightened trade tensions and rising expectations for ECB rate cuts in June.

Fundamental Drivers

1. Cipollone Flags Recession Risk from Trade Wars
   • ECB board member Piero Cipollone warns that global trade fragmentation could trigger an "unambiguously recessionary" impact.
   • Euro area investment may fall by 1.1% and GDP by 0.2pp % in 2025–26.
   • This aligns with growing ECB sentiment that rate cuts are warranted to cushion downside risks.
2. Disinflation Pressure Mounting
   • While trade wars can fuel inflation via tariffs, Cipollone believes in the short to medium term, the eurozone may face disinflation due to declining investment and demand.
   • This supports a dovish ECB stance, especially as HICP inflation is expected to return to the 2% target.
3. Strategic Warnings on Fragmented Global Finance
   • Cipollone highlighted the risk of capital flow disruptions, currency volatility, and a challenge to the U.S. dollar's dominance if global blocs decouple.
   • He urged G20 nations to avoid protectionism and rebuild trade coordination, warning of long-term systemic threats to financial stability.
4. Market Implications for EUR
   • Traders now fully price in a June rate cut by the ECB.
   • Any signs of further trade tension—particularly involving the U.S. and EU—could weigh heavily on EUR sentiment and heighten the chance of more easing in H2 2025.

Key Takeaway for Traders

• The Euro is vulnerable as the ECB leans more dovish in response to global trade risks and economic fragmentation.
• Cipollone's recession warning adds to the June rate cut narrative, and with disinflation in play, further easing cannot be ruled out.
• EURUSD could stay under pressure unless incoming data on inflation or GDP surprises to the upside.

EURUSD – H2 Timeframe

After price movements swept below the previous low, we see it break above the last high on the 2-hour timeframe chart of EURUSD, thus forming an SBR pattern. The highlighted demand area also overlaps with trendline support and falls within the key levels of the Fibonacci retracement tool. These confluences point to the likelihood of a bullish outcome.

EURUSD – H1 Timeframe

What we see on the EURUSD 1-hour timeframe chart is no different from the 2-hour timeframe scenario. However, on the 1-hour timeframe chart, we see the huge momentum candle demand, with an inside bar and a fractional low enmeshed within it. Although the total area of the huge red candle can be considered our area of interest, the highlighted zone will be the center of focus.

Analyst's Expectations:

Direction: Bullish

Target- 1.14332

Invalidation- 1.13287

CONCLUSION

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