Euro cuts gains after initial strong performance

The euro initially climbed to $1.176 in early trading on Monday, buoyed by optimism over the newly announced US-EU trade agreement. However, the rally was short-lived, and the common currency later reversed all its gains, sliding nearly 0.5% to $1.168—its lowest level in a week—under pressure from broad-based dollar strength.

The dollar gained momentum as investors digested the full implications of the trade deal and shifted focus toward upcoming U.S. monetary policy developments.

The US-EU trade agreement, though welcomed for averting a more severe tariff escalation, includes a 15% tariff on European exports to the U.S.—a compromise from the initially proposed 30% rate by President Trump.

The deal carves out exemptions for certain goods, such as aircraft components and specific industrial chemicals, while reducing tariffs on automobiles from 30% to 15%. In exchange, the EU agreed to significantly boost its purchases of U.S. energy products and expand investment in American infrastructure and supply chains, signaling a pivot toward deeper transatlantic economic cooperation.

While markets initially responded positively to the reduced tariff scope and the avoidance of a broader trade conflict, the deal had been widely anticipated and thus failed to sustain a meaningful rally in the euro. Moreover, many European policymakers and analysts expressed concern that the agreement remains disproportionately favorable to U.S. interests.

Critics argue that it places undue pressure on key European industries—particularly automotive and chemicals—while offering limited reciprocal concessions. These perceptions may weigh on sentiment toward the euro in the short term, especially if political backlash within the EU gains momentum.

Meanwhile, attention is quickly turning to the Federal Reserve’s upcoming monetary policy decision, which is expected later this week. With inflation still above the Fed’s long-term target and labor markets showing resilience, markets are speculating whether the central bank will maintain its current hawkish stance or begin signaling a more cautious approach. Any indication of policy tightening or a shift in the Fed’s forward guidance could further strengthen the dollar, adding downside pressure on the euro.

Additionally, diverging economic trajectories between the U.S. and the eurozone continue to influence currency markets. While the U.S. economy remains relatively robust, the eurozone has shown signs of stagnation amid sluggish industrial output, soft consumer spending, and elevated energy costs. As a result, traders are becoming increasingly cautious about the euro’s near-term prospects, especially in the face of persistent dollar strength and heightened geopolitical uncertainty.