08:38 AM EST, 11/21/2024 (MT Newswires) -- The euro (EUR) has been consolidating at lower levels over the past week resulting in EUR/USD trading within a narrow range between 1.0500 and 1.0600, said MUFG.

It still leaves the euro as one of the worst-performing G10 currencies this month alongside the Swedish krona, wrote the bank in a note to clients. Both currencies have been hit harder by the United States election victory for Donald Trump which has increased the likelihood of another trade war that will add to downside risks to the already weak growth outlook in Europe.

Sweden's Riksbank delivered a larger 50bps rate cut this month after it was disappointed by the lack of clear evidence of economic recovery with Sweden's economy still in recession, pointed out MUFG. While the eurozone economy has performed better with growth coming in stronger than expected in Q3, the European Central Bank has become more concerned that risks to its inflation outlook are beginning to shift to the downside.

The presidential election victory for Trump will reinforce those concerns especially if he follows through by imposing higher tariffs on imports from the European Union next year, stated the bank. Trump's decision to pick Howard Lutnick to be the next Commerce Secretary and to give him special responsibility for the office of the US Trade Representative gives a strong indication that Trump plans to follow through with his tariff plans.

During the election campaign, Lutnick served as spokesman for some of Trump's most controversial plans including wide-ranging tariffs and the elimination of income tax.

European markets are initially viewing potential trade disruption as more of a negative growth shock for Europe rather than an inflation shock unlike in the US. A view shared overnight Wednesday by ECB Governing Council member Francois Villeroy de Galhau who stated that potential trade levies aren't expected to significantly derail the ECB's easing plans.

The ECB policymaker still believes that risks to the inflation outlook and growth are "shifting to the downside." At the same time, he downplayed the release of much stronger negotiated wage data from the eurozone for Q3. He stated "let me stress that the latest rise in negotiated wages in the third quarter is a somewhat backward-looking indicator, mainly driven by the lagged effects of past negotiations in Germany....and it was already taken into account in our September projections."

The dovish comments support current market expectations for the ECB to lower rates for the third consecutive meeting in December, and to keep lowering rates towards 2.00% next year, according to MUFG.

The latest negotiated wage data from the eurozone revealed growth accelerated to 5.4% year over year in Q3 up from 3.5% in Q2 which is well above the 3% increase in overall wage growth considered by policymakers to be consistent with price stability. Wage growth in Germany was the strongest since 1993 up 8.8% year over year in Q3.

The ECB expects wage growth to slow more sharply next year. More persistent wage growth alongside a weaker euro and retaliatory EU tariffs are three potential upside risks to the inflation outlook that could make the ECB become more cautious about continuing to cut rates in the year ahead, added MUFG.