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Investing.com -- A sharp increase in U.S. tariffs on European Union (EU) goods could trigger a broader economic and market reaction in the euro area, according to Barclays (LON:BARC) strategists.
The bank warned that a 30% tariff, as recently proposed by President Trump, would likely result in EU retaliation, a deeper slowdown in growth, and prompt the European Central Bank (ECB) to ease rates further.
“If the U.S. were to increase tariffs on EU goods up to 30%, we would expect retaliation from the EU, a more prolonged and deeper economic slowdown, the ECB to cut policy rates to 1% by Q1 2026, lower EUR core rates, EURUSD to come under pressure and the EU equity market resilience to be put to the test,” the strategists wrote.
While Barclays’ base case assumes a 15% average tariff, it flagged downside risks should higher duties materialize.
In that scenario, euro area GDP growth could decline by an additional 0.7 percentage points, and the ECB may respond with more aggressive rate cuts.
The deposit rate could be reduced to 1%—and potentially lower—if inflation undershoots the 2% target more persistently than expected. Inflation could remain below target until at least 2027, with fiscal support likely delayed until 2026.
In currency markets, the euro may face a more difficult backdrop, strategists said. They note that while the euro has been the top-performing anti-dollar currency since early April, “a hefty tariff schedule against the EU in particular and a markedly lower ECB rate path would make for a more challenging environment for the EUR.”
Equity markets are also exposed. A 30% tariff scenario would test the resilience of the TACO trade and could trigger another sharp sell-off similar to the post-Liberation Day slump.
However, Barclays believes that “Trump’s tolerance for equity and bond market stress is limited,” which may ultimately cap the extent of tariff hikes.
“The next few days will likely tell us what level of tariffs markets and trading partners are ultimately willing to tolerate. If the situation de-escalates, we still see a case for EU equities to breakout in the second half (H2),” strategists said.
Looking ahead, Barclays expects U.S.-EU negotiations to continue through the coming weeks, with a provisional deal still possible by August 1.
However, it sees a gradual increase in tariff rates as more likely, potentially rising above the current 10% but remaining below 30%, alongside the introduction of additional sector-specific tariffs on EU exports.