Washington is willing to discuss eliminating the tariffs with China and the EU

During the time when Donald Trump has been the US president, investors got used to paradoxes and see them as an essential element of the modern financial markets. The US president charges China and the EU with deliberate devaluing yuan and euro, however, the Treasury Department hasn’t called the European Union and China currency manipulators during a few quarters. The US president Donald Trump claims that it is easy for the US opponents to make money, as their local currencies are losing in value, but supports the process himself. The risks of scaled up trade wars result in slower PMI and GDP growth, and the divergence in economic expansion of the USA and the euro-area is an advantage for EUR/USD bears.

Euro hasn’t been that responsive to the Markit statistics. Bulls were hesitating, about whether to be happy with the increase in German manufacturing PMI for the first tome over the last seven months, or to be upset about Composite Purchasing Managers’ Index drop down to 20-month low. The market participants thought consolidation to be the best solution ahead, perhaps, fateful meeting of Donald Trump and the European Commission chief Jean-Claude Juncker. On the eve, the US president announced that the USA is willing to make a step towards free trade, but the EU wouldn’t agree. He noted sarcastically that the EU's top officials, representatives of the region, having traded unfairly with the USA over many years, would visit the White House in Washington to negotiate.

Dynamics of Composite PMI and Economic sentiment in Euro-area

Source: Bloomberg

The White House’s leader is obviously exaggerating. Yes, for some positions, the EU tariffs look significant, but if one assesses the average amount of tariffs, there is nothing to argue about. For the European goods, imported into the USA it is 3.3%; for the US products, supplied to the European markets, it is 3%. Trump needs to somehow justify what he is doing, but, in fact, Washington’s objectives are clear. According to IMF, the USA is the main source of global imbalances. The share the US current account deficit in the global indicator has been up from 39% to 41% in 2017. And, taking into account the US fiscal stimulus and the strong economy, it is going to expand in the next few years.

So, the US protectionism is unlikely to cover its foreign trade deficit. Nevertheless, the US dollar has far greater advantages in the different monetary policies of the Fed and the ECB and the economic expansion. The Euro-area doesn’t suggest any signs of economic recovery in the second quarter; and the European central bank has deeply convinced investors that it is not going to the interest rate through at least September, 2019. Therefore, the derivative market more and more doubts that the ECB target rate will change in December, 2019.

Dynamics of the probability of the ECB interest rate hike

Source: Bloomberg.

I, personally, believe that but for Donald Trump comments, the EUR/USD correction towards the long-term uptrend would continue. I still expect EUR/USD consolidation in the range of 1.15-1.2.

 

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Real-time price chart of EURUSD

Dollar Votes for Free Trade

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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