The effect of tariffs on the US economy has been a focus for financial markets this year. That’s understandable. Not only did the US introduce the tariffs, with very little reciprocity from abroad, but estimates suggest that it will be the US economy that sees the worst outcome in terms of growth and inflation, at least initially. But we should not forget that tariffs adversely impact everyone. And it may be here where the biggest shocks lie.

The eurozone released a shockingly bad trade figure for June. The unadjusted surplus of EUR7bn was less than half of the prior months’ figure and was also about half of that anticipated by the market. In seasonally adjusted terms, the deficit was even worse, at EUR2.8bn which is the smallest since the energy price shock arising from Russia’s invasion of Ukraine pushed eurozone trade into the red through 2022 and early 2023. The trade surplus with the US slumped to EUR8.7bn from EUR17.6bn in May showing the clear effect of US tariffs. Of course, this dire data has to be put in context.

Back in March, the eurozone had its largest ever surplus with the US by some distance. The EUR35.3bn surplus in March was more than double the average surplus that we saw in 2024. So, the June figure reflects continued payback for that surge in the surplus that we saw just ahead of tariffs. A corollary of this is that it could still take some months yet before we can tell just how much the eurozonetrade surplus has been punished by US tariffs.

An added complication is the volatility in trade between Ireland and the US given that Ireland is home to a number of key US industries, including pharmaceuticals where new tariffs are expected soon. Bringing to light the volatility in the euro zone trade balance reveals the danger in assuming that economic growth will not be hit too hard by tariffs. Most estimates of the short-term impact of US tariffs on the euro zone economy put the damage at around 0.2 percentage points, as opposed to the US where the hit is estimated at around 1-1.2 percentage points.

Should we fear a bigger hit to eurozone growth than generally anticipated, perhaps with the result that the ECB has to ease further? The market is not fully priced for the ECB to cut rates again, but many analysts believe that this will prove incorrect for a couple of reasons.

The first, on trade, is that we not only need to bear in mind the direct damage to eurozone trade from US tariffs, but also the potential for indirect effects should others, notably China, redirect US-bound exports to the eurozone instead. It was notable that the eurozone June trade surplus included a notable widening in the deficit with China to around EUR29bn from EUR20bn in the prior month.

Unlike the US dollar, which has fallen slightly against the renminbi this year, the euro has rallied by around 10%. That could prove an influential factor in sucking in more imports from China, at a cost in terms of poor trade data and a hit to eurozoneGDP. The euro’s rise, which has also been around 10% against the US dollar, will additionally bear down on inflation and, in Steven Barrow, Head of Standard Bank G10 Strategy’s view, increase the risk that eurozone inflation undershoots the 2% target for longer than the ECB currently anticipates. Put all of this together and we see a clear risk that the hit to eurozone growth will be bigger than the models might suggest that inflation will be lower, and that the ECB will be pushed into at least one more rate cut. The ECB’s next meeting is on September 11th and the market ascribes no more than a 5% chance of a 25-bps rate cut.

Steven Barrow thinks that is fair. But market pricing later in the year barely shows any increase in the probability of another rate cut from the ECB, and that is incorrect. Instead, Steven Barrow thinks another 25-bps cut is likely in Q4 with a second to follow in Q1 next year. Could this scenario weigh on the euro? Very possibly, and especially if the Fed is reticent to match the three 25-bps rate cuts priced into the US curve by the end of Q1 next year. “This being said, we do not think that these interest rate trends will dominate the bearish factors that seem to be in place for the US dollar right now. Nonetheless, traders should play this view through the rates market, not FX”, said Steven Barrow.