Tries to isolate the USA will result in another round of trade wars

The summit of the world’s leading countries in Canadian Quebec became another evidence that trade wars will affect Forex for a long time. The matter of how to get use of these factors is quite hot. A try to isolate the USA and turn the G7 into the G6 looks ridiculous. If back in the 1900s the G7 held over 50% of global GDP, now, its share is not more than one third. If the USA is expelled from the club, the G7 will become a big zero. Yes, the Group of seven is against the protectionism, but Washington is by no means supporting it! Donald Trump called for competitive trade without any barriers. According to WTO, in 2015, the import tariffs were about 3% on average in the EU, in Canada- 3.1%, in the USA – 2.4%. The present US president is not responsible for his predecessors; he is just trying to put all the countries on an equal footing.

Trade wars affect Forex in a very peculiar way. On the one hand, the US president’s policy is taken as antiglobalism, deprives dollar of the trust and results in Treasuries yield drop. The US government bonds are losing its appeal for foreigners, and Washington is facing the problems with funding its huge fiscal stimulus. On the other hand, wars put a pressure on global economies; at the same time, the USA, with its tax reform, is likely to expand faster than other economies. In this context, the greenback grows stronger, as a rule. Especially since, the most of negative will be associated with the Eurozone, highly dependent on export.

Investors are switching their attention to the meetings of the ECB and the Fed, as they don’t clearly understand how trade wars affect Forex and try to find any clues in numerous events of the economic calendar. Ahead the Governing Council’s meeting, its plenipotentiaries hinted at the official announcement of ending QE, driving EUR/USD up from ten-month lows. There is no smoke without fire. However, the derivative market’s concerns about the euro weakness, indicated by its risk reversal, suggest the ECB will hardly take its important decision before July. It is most likely to announce extending QE through late 2018 with reducing asset buyouts to €15, from €30 per month.

Dynamics of euro risk reversal

Source: Bloomberg

It can well turn out that 53% oil growth for the recent year will cause European HCPI to stay close to 2% in May-July; however, poor core inflation, unemployment rate, higher than that before the crisis (except for Germany), and other weak indicators suggest that QE will be retained.

For now, euro is rising on the expectations of the ECB hawkish rhetoric; and the central bank, based on the short-term CPI dynamics, can afford to sound hawkish. The matter is what is going to change in the middle run, and whether the factor of the higher FOMC rate is already included into the pair’s rate. Yes, breaking through the resistance at 1.1815 will suggest buying more euro with renewed vigour. But won’t EUR/USD bulls’ victory turn out to be a Pyrrhic one?


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Price chart of EURUSD in real time mode

Dollar Turns G7 into a Big Zero

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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