"We were the first, and all you can do is imitate." The U.S. initiated trade wars, imposed the most sweeping tariffs since the early 19th century, granted a deferral, and now plans to send letters to other countries outlining the tariff rates. The rest of the world is left to decide whether to respond with counter-tariffs. Only 10 days remain until the deferral expires, and Donald Trump has declared — "Don't expect mercy!" The letter may even include a greeting card: instead of 10%, you'll pay 25%.

As the X-date approaches, tensions are mounting. Treasury Secretary Scott Bessent stated that after July 9, the universal 10% tariff may remain in place or be increased. It all depends on whether a particular country negotiates trade deals with the U.S. in good faith or not. However, Trump later said that he could impose higher tariffs unilaterally — even before July 9. "We can do whatever we want!" he claimed.

German Inflation Dynamics

In theory, the country imposing tariffs should see an increase in inflation. For the targeted country, consumer price growth should slow instead. Tariffs influence domestic demand, and the resulting economic slowdown is reflected in the CPI. These dynamics are now beginning to show in Germany and other Eurozone countries. In June, consumer prices decelerated. Inflation across the euro area is also expected to slow to 1.9%.

On paper, this suggests that the European Central Bank should ideally restart its monetary easing cycle and lower the deposit rate below 2%. However, comments from members of the Governing Council suggest that the process has either concluded or is nearing completion. Derivatives markets are pricing in just a 25 bps cut to 1.75% by the end of 2025.

The Federal Reserve is a different story. Whether it's pressure on Jerome Powell from the White House, the ongoing disinflationary trend, or the cooling labor market and economy, the futures market is now expecting more than 60 bps of rate cuts. This implies two rounds of monetary easing by the end of this year, with nearly a 50% chance of a third. How is the U.S. dollar supposed to avoid falling in such a scenario?

Market Expectations for the Fed Rate and U.S. GDP

The divergence in monetary policy, capital outflows from the U.S. to Europe, erosion of trust in the dollar due to Trump's attacks on the Fed, and other factors have pushed EUR/USD into a zone of more than three-year highs. The question is: can the pair consolidate at these levels? Everything will depend on the U.S. labor market data for June.

Technically, on the daily chart, EUR/USD is in a short-term consolidation near its three-year high. A breakout above the local high at 1.175 will serve as a trigger for increasing long positions in the euro against the dollar. Conversely, a decline below 1.1675 will open the way for a correction.