Yannis Stournaras, a policymaker at the European Central Bank, warned that tariffs from the Trump administration could lead to a substantial demand shock in the euro area. He indicated that a potential global trade war may adversely affect Europe’s economic growth.
The estimated negative effect on euro area growth could range from 0.5 to 1 percentage points. Following this news, the EUR/USD exchange rate was recorded at 1.0967, reflecting an increase of 0.11% during the day.
Potential Impact Of Trade Tensions
Stournaras’s comments add weight to deepening concerns about the potential consequences of trade tensions initiated by the United States. A demand shock of the magnitude he outlines—between 0.5 and 1 percentage points—would imply slower activity across sectors closely tied to external demand. Manufacturing and export-heavy services, in particular, would feel the brunt through reduced orders and longer inventory cycles. At the same time, investment sentiment would likely weaken, as firms adjust capex forecasts in anticipation of lower revenue clarity.
From a market structure perspective, such conditions tend to increase short-term volatility, particularly in interest rate and currency derivatives. A flattening of the euro-area swap curve could accompany reduced inflation expectations, should demand-side weakness become more entrenched. More subtly, we may begin to see an uptick in implied volatilities across front-end EUR options, reflecting a reassessment of ECB response probabilities.
With EUR/USD ticking up slightly to 1.0967, markets may already be attempting to price in a more dovish tone from monetary authorities, or alternatively, a mild flight away from dollar assets given political disruptions overseas. The relatively measured appreciation suggests positioning remains cautious, possibly stalled by crosscurrents between central bank communication and geopolitical instability. There’s little to suggest speculative flows are dominant yet, with option skews relatively neutral.
Monitoring The Eurozone Market
For those of us watching flow dynamics, it means that spread adjustments in Eurozone rate products could carry information value over the next fortnight. Particular attention should be paid to movements in 2s5s and 5s10s structures, as well as overnight index swap (OIS) forwards during ECB blackout periods. Deviations from historical ranges may not only reflect changing expectations but also opportunistic hedging activity.
Importantly, liquidity depth in EUR futures and forwards should be monitored closely. Any meaningful divergence from typical bid-ask patterns into low-volume hours may signal concern over pricing gaps. Historically, thinner books during policy uncertainty have coincided with less predictable intraday swings, even in benchmark contracts.
We should also be alert to how region-specific data, especially German and French PMI prints, interact with macro hedge fund rebalancing inputs. A deterioration there could further amplify defensive positioning, with long gamma strategies appearing incrementally more appealing in case of a sentiment-driven reprice.
