The Trump Trade: Tariffs Distort US Growth and Fuel EUR/USD Rally

President Trump’s tariff policy has distorted key US economic data and market trends. Tariff-driven activity inflated GDP and spending figures in early 2025, masking underlying weakness. Businesses and consumers rushed to purchase before new tariffs, creating artificial short-term growth. However, slowing labor indicators, rising inflation expectations, and fragile financial markets suggest deeper structural problems. This article examines how Trump’s tariffs disrupted economic stability, pressured the US dollar, and fueled a strong rally in EUR/USD.

How Trump’s Tariffs Distort US Economic Data and Mask Real Growth

President Trump’s tariff policy has disrupted the US economy. Because of temporary factors, the US GDP numbers do not accurately reflect the true health or direction of the economy. Businesses and consumers rushed to import goods before tariffs took effect in April, which inflated GDP, investment, and spending numbers.

Companies accelerated inventory accumulation to avoid anticipated price increases from tariffs. Additionally, consumers brought forward purchases, particularly in the automotive sector. These front-loaded activities temporarily boosted GDP but are expected to weigh on future growth.

Meanwhile, a decline in aggregate weekly hours worked during Q1 provides a more accurate signal of a slowing economy. The chart below shows that the US GDP contracted in Q1 2025, raising concerns about a potential recession.

On the other hand, inflation trends also reflect tariff-driven shocks. Core PCE rose sharply by 0.5% in February, then dropped to just 0.03% in March, as shown in the chart below. Despite this decline, the Fed will unlikely proceed with further rate cuts.

Meanwhile, consumers expect prices to rise further amid uncertainty in the financial system. The University of Michigan’s April survey indicates that Trump’s tariff plans fuel inflation fears. Inflation expectations for April 2025 have climbed above 6%, as shown in the chart below.

Market Volatility Rises as Tariff Uncertainty Weighs on Investor Sentiment

Financial markets remain fragile under the weight of tariff uncertainty. The S&P 500 edged higher but lacked strong momentum. Investors stay cautious as tariff negotiations continue to stall. The chart below shows that the financial liquidity eased slightly to -0.45% on April 18, but long-term trends indicate tightening conditions ahead.

The chart below shows that Moody’s Baa bond spreads peaked at 2.02% and remain elevated.

Trump’s Tariffs Undermine US Dollar Strength and Confidence

Trump’s tariffs have weakened the US dollar. Rising inflation and fiscal deficits are damaging investor confidence. Tariffs are pushing up prices while growth slows, creating a stagflation-like environment that is making the dollar less attractive to global investors.

US Dollar Faces Technical Breakdown and Bearish Outlook

The monthly chart of the US Dollar Index shows that it has been trading within an ascending channel since 2009. Consolidation within this channel has stabilized over time. However, the index has repeatedly failed to break above the key resistance level at 115, keeping the door open for a potential decline.

The peaks near 115 and 110, highlighted by red circles, mark the points where each downward leg began. The index has also broken a triangle pattern within the ascending channel and is now moving toward the 96–97 area. A decisive break below this level could trigger a sharp decline toward the 90 zone. The index must recover above 110 to resume the long-term upward trend.

EUR/USD Breakout Gains Momentum as Dollar Retreats

The weakness in the US dollar benefits the euro. EUR/USD has room to rise as traders move away from dollar-denominated assets. The monthly chart for EUR/USD shows a breakout from the falling wedge pattern, with the April 2025 close above $1.12. This breakout opens the door for a potential move toward the $1.22 area. Moreover, the RSI has moved above the midpoint, strengthening the bullish trend. The decline in the US dollar has triggered this strong rally in EUR/USD.

The daily chart for EUR/USD shows a strong reversal from the $1.02 area, driven by the formation of a cup pattern. The breakout above $1.05 confirmed this pattern and opened the door for a strong rally in EUR/USD. The crossover of the 50-day SMA above the 200-day SMA further highlights the positive trend. Investors and traders may consider buying on pullbacks, targeting a move toward the $1.22 area.