EUR/USD is up above figure 16 base as global trade war grows more likely

Another round of a poker game between Washington and Beijing has increased the demand for safe-heaven assets, dropped the US Treasury yields and discouraged dollar fans. Donald Trump raised the stakes up to the record $200 bn, perfectly understanding that China can’t respond in the same way. China exports into the USA far less goods than it buys from the USA. There are only services, capital accounts and the activities of the US companies in China left to be affected. According to blackmail charges and promises to retaliate, Beijing is willing to take this step.

I have emphasized many times that each conflicting party has its own truth. According to allegedly surprised Donald Trump, Beijing should have accepted $50-bn import duties without any complaints. But China hit back, targeting the US farmers, who did nothing wrong. It is remarkable that agricultural producers are supporting the president less and less. They were almost unanimous about voting for the Republican, having promised to cancel inheritance taxes in 2016, but the situation has changed since then. Not only, according to the US Department of Agriculture, farmers ‘net profit will be 6.7% down in 2018, at $59.5 bn, but there are also tariffs applied by Mexico, the EU and China, which make them suffer even more. The support of the president is very important. Remember, the loss of voter confidence in the president in early 2017, dropped the USD index down from 13-year high.

The situation was fueled by the information that the Senate had blocked the US administration’s contract with Chinese telecom giant ZTE.

Dynamics of US import prices and US core inflation rate

Source: Trading Economics

Refreshed trade conflict between China and the USA made the topic of the ECB forum on central banking in Portuguese Sintra less important. A year ago, Mario Draghi’s announcement that the ECB would be gradually quitting its quantitative easing program triggered the EUR/USD rally. Now, according to Credit Agricole, it won’t happen, as after the Fed’s and the European central bank’s meetings in June, the markets are again discussing the divergence in their monetary policies.

I think, the main reason for EUR/USD drop in April-June was the different paces of economic expansion in these two regions, rather than the divergence. If the positive statistics on the USA is mostly included in dollar pairs’ rates, the improvement of the Eurozone situation will support gradual restoring of euro uptrend. In the short run, as raised poker stakes are said to be just Donald Trump’s further bluffing, EUR/USD bears are still willing to storm the support at 1.15.


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