EU Signs Major Trade Agreement with India. Overview of EUR/USD

[Ben Graham]

Economic indicators from the Eurozone over the past week have demonstrated notable synchronicity, reinforcing the market's view that the recovery is slow but steady. According to the ECB, the situation is entirely under control and is quite satisfactory for the central bank. Predictability is crucial, and it is something that has long been lacking in the Eurozone, leading to increased confidence in the euro.

The January Ifo indices in Germany have changed little compared to December; in the manufacturing sector, the index saw a significant increase, and expectations became noticeably less pessimistic. Meanwhile, in the services sector, both the business climate and the current situation are assessed slightly worse.

Similar trends are seen in the PMI data for Germany and the Eurozone as a whole, where the composite index, reflecting business activity in both sectors, has remained at December's level of 51.5. Expansion is ongoing, but it is not strong enough to raise concerns about overheating.

On Tuesday, a comprehensive trade agreement between India and the EU was signed, reportedly in the works for nearly two decades. The agreement outlines a gradual reduction of mutual tariffs to zero, and now all eyes are on how the White House will react. Treasury Secretary Scott Bessent promptly criticized the EU, noting that the agreement contradicts US interests.

It is likely that a comment from Trump will follow soon. The US has imposed 25% tariffs on oil purchased by India from Russia, while Europe is ready to buy processed products from this oil from India without tariffs. This situation is seen as an egregious violation of US interests, and both the EU and India may experience increased pressure to abandon the agreement. Trump has repeatedly confirmed his ability to find reasons for crises out of thin air, for which he believes he deserves a Nobel Prize, and this provides him with a splendid opportunity.

However, until there is a reaction, one must consider that for the euro, such an agreement is an entirely bullish factor, and the European currency will capitalize on it to the fullest.

The calculated price has lost its upward momentum over the last two weeks, largely due to a reduction in net long positions in the euro. A week ago, we suggested that testing the support level of 1.1520/40 had become more likely; however, two subsequent events have completely overturned this scenario. Regarding Greenland, Trump, as usual, backed down, refusing to impose tariffs after EU countries announced their readiness to implement countermeasures. The situation here remains uncertain. In contrast, the sharp decline in the dollar following the yen crisis had a decisive impact, with the EUR/USD pair hitting a 4.5-year high and seemingly poised to go higher. In the changed conditions, the likelihood of a decline in the euro has significantly decreased, and we expect a move toward the next target of 1.2270.

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