Trade wars and Brexit makes EUR/USD uptrend less likely to restore

The US dollar quickly recovered amid the sharp rise of 10-year Treasury yield and Steve Mnuchin’s comforting comments. The Treasury Secretary managed to ease the effect of Donald Trump’s verbal interventions by saying that Washington is not going to interfere with the foreign exchange market, and the US president and the US Treasury Secretary personally support the Fed’s independence. His comments accelerated the US bond yield growth, which started due to the rumours about monetary normalization by BoJ. Taking into account the importance of Japanese investors for global financial markets, we shouldn’t be surprised by their response to the current situation in Japan.

The strong positions of the greenback got the yuan to renew its yearly lows. Even though Donald Trump charges China with manipulating the exchange rates and threatens with $500-bn import tariffs, Beijing has ready answers to everything. China is doing what it has been asked by the IMF and the USA during many years; it lets its national currency rate move according to the market forces. In theory, import tariffs should cut the US-China trade deficit, which is a bullish factor for USD/CNY. If we add the divergence in economic expansion and monetary policy, the situation is not so good for any currency, competing with the US dollar.

It is also true for the Eurozone. The US president threatens the EU with new tariffs on car imports. And the area, whose GDP growth depends on export, will face serious problems. However, Steve Mnuchin claims that the USA is willing to negotiate with the European Union, Japan and China, provided the latter cancel all the present tariffs. France responded that it is not willing to negotiate at gunpoint. It is likely to retaliate.

Trade war and Brexit are the biggest ECB’s concern, as it has every reason to retain the interest rate at the current levels through at least September, 2019. Even if EUR/USD bulls hope for QE end and the start of the monetary normalization, it would still be slower than the Fed, so euro fans aren’t yet going long. According to the consensus forecast of Bloomberg experts, EUR/USD rates will be close to 1.18 at the end of the year. It was about 1.26 just a couple of months ago.

Dynamics of EUR/USD and Bloomberg forecasts

Source: Bloomberg 

The US dollar, on the contrary, is quite popular. Hedge funds and futures speculators expanded their long dollar bets up to the highest level since February, 2017. In this situation, Donald Trump’s FX comments were just necessary to discourage them a little.

Dynamics if speculative net positions for US dollar

Source: Bloomberg

EUR/USD quotes went down below figure 17 base, ahead the important reports on PMI in Germany and the euro-area. Positive report on Purchasing Manger Index will enable euro bulls to resume their attack; weak data, on the contrary, will return the control to their opponents.

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Real-time price chart of EURUSD

Euro: Haste Makes Waste

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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