Euro sinks amid trade deal fallout

The euro slipped below $1.16, extending Monday’s 1.3% decline—the sharpest one-day drop in over two months—and hitting its weakest level since June 20.

The move reflected growing investor concern that the newly announced trade deal between the US and the European Union disproportionately benefits the US, offering little to improve the eurozone’s economic outlook.

The agreement has drawn strong criticism from France, which described the terms as "lopsided and rushed," while others—including German Chancellor Merz—have emphasized the potential negative impact on European exporters and, by extension, economic growth.

Sentiment was further dampened by a series of disappointing data releases. Preliminary figures showed that industrial production in Germany contracted 0.4% in June, falling short of expectations, while consumer sentiment indicators in France and Italy pointed to softening demand. These weak data points reinforced the view that the eurozone’s fragile recovery remains vulnerable to both external shocks and domestic imbalances.

Meanwhile, market participants turned their attention to the Federal Reserve's policy decision due Wednesday, just ahead of President Trump’s August 1 tariff deadline. With US inflation running above expectations and the labor market still tight, there is growing speculation that the Fed may adopt a more hawkish tone, which could further widen the interest rate differential between the US and Europe.

In Europe, rate cut expectations also shifted, with markets postponing the likelihood of a 25 basis point cut to March 2026, now pricing in a 90% chance by then. For December, the probability of a cut has fallen below 70%, down from 85% just two weeks ago, as recent comments from ECB policymakers signaled a pause in further easing barring a material deterioration in economic conditions.

Traders are now closely watching upcoming inflation and GDP figures across the euro area to gauge the ECB's next steps.