A 20% tariff on the EU could shave 0.3 percentage points off eurozone GDP over two years, weakening activity and pressuring the EUR medium term. Meanwhile, UK face limited tariffs thereat from the US as UK’s trade surplus with the US is largely driven by service sectors such as financial and business services, which are less susceptible to direct tariff measures and have not been targeted by the US administration.

EUR: US Tariffs focus

Over the past week, the dominant market narrative has centered on the so-called US ‘Liberation Day’, following former President Trump's announcement of a 20% tariff on imports from the European Union. However, the euro's recent resilience was not driven by intrinsic EUR strength but rather by broad-based USD weakness, as markets grew increasingly concerned about the potential negative impact on US growth and the rising risk of recession. In Europe, comments from the Spanish Prime Minister contributed further to USD softness. The PM urged the European Commission to strengthen global trade ties in response to US tariffs and proposed a EUR 14.1 billion package to shield the Spanish economy. Meanwhile, French President Macron called on major European firms to suspend investment in the US as a retaliatory signal. Consequently, markets are now positioning for potential EU countermeasures. European Commission President Ursula von der Leyen confirmed that the EU is preparing retaliatory actions to safeguard its interests should negotiations collapse. To note, a 20% blanket tariff on EU goods could subtract 0.3 percentage points from eurozone GDP over the next two years through direct and indirect trade effects alone. Moreover, the likely drag on consumer and business sentiment would slow eurozone growth further, exerting additional medium-term downside pressure on the euro.

On the domestic front, March inflation data in the eurozone came in soft, reinforcing the case for another rate cut at the ECB’s April meeting to push the policy rate more firmly into neutral territory. Headline inflation eased slightly to 2.2% from 2.3%, while core inflation declined to 2.4% from 2.6% after months of stickiness at 2.7%. At the March ECB meeting minutes, views on the timing of the next rate cut became increasingly divided. Dovish members emphasized downside inflation risks, particularly from rising trade tensions and the stronger euro. In contrast, hawkish members pointed to persistent services inflation, robust domestic price pressures, and Germany's fiscal U-turn as reasons for caution. Some policymakers indicated they would only support a 25bps cut if accompanied by revised forward guidance that avoided signaling additional cuts or a defined policy trajectory. The key question now is whether the newly announced tariffs will shift hawkish members toward supporting further easing. The dovish camp appears firmly aligned. Overall, the combination of negative trade shocks, weakened confidence, and limited prospects for a near-term resolution is likely to bring enough consensus to support another 25bps cut in April, adding further downside pressure to the euro.

Looking ahead, the eurozone calendar is relatively light, with no major market-moving events scheduled. As a result, investor focus will remain on how the EU responds to US tariffs and what potential countermeasures may entail. Absent a significant positive surprise, the EUR is likely to remain under pressure amid elevated uncertainty.

GBP: Better than EUR

Over the past week, GBP performance was mixed following the US tariff announcement. The pound underperformed against traditional safe haven currencies while outperforming some of its high-beta, pro-cyclical counterparts. This reaction aligns with historical patterns, as GBP tends to exhibit defensive characteristics among risk-sensitive currencies — particularly when compared to those more exposed to global trade tensions. Despite the UK being hit with a 10% tariff on its exports to the US, the pound held relatively stable. This reflects its positioning as a ‘quasi’ safe haven within the G10 pro-cyclical group. However, given the prevailing uncertainty, there is limited scope for GBP appreciation in the near term. Traditional safe haven currencies are likely to dominate flows, while the pound may only regain traction over the medium term once risk sentiment stabilizes.

Looking ahead, the GBP calendar is relatively light, with only second-tier data such as GDP figures on the docket. However, in the current risk-off environment, market participants are likely to look past incoming macroeconomic data — whether strong or weak — as trade uncertainty remains the overriding theme. Focus will remain on any developments surrounding US trade policy, particularly after Trump hinted at the possibility of a more flexible stance. Until clearer signs of sentiment recovery or a shift in the trade narrative emerge, GBP is expected to remain sidelined.

EUR/GBP 4H

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