Eased trade tensions between the USA and the European Union can support the EURUSD uptrend recovery

A ceasefire in the trade battle between the USA and the EU encouraged bulls to draw the EURUSD quotes above figure 17 base. Donald Trump and the president of the European Commission Jean-Claude Juncker agreed on co-operation to reduce the present import duties for industrial products, except for car imports, and to avoid new trade barriers. The EU promised to buy more liquid natural gas from the USA and reduce the tariffs on the imported US soy beans. Therefore, Trump wants to improve the life of the US farmers, got into trouble due to the US trade war with China.

According to the recent research, held by the Bank of France, trade wars are the main reason for the decline in the euro-area economic expansion. Other negative factors are considered to be a decline in productivity, higher borrowing costs and a decrease in investment demand.

Impact of negative factors on the euro-area GDP

Source: Bloomberg. 

So, if the trade barriers will be finally eliminated, a gradual rise in the European PMI will signal the euro-area economy’s recovery and enable the ECB to normalize its monetary policy sooner than the financial market currently expects. According to Bloomberg, the rate on deposit facility will be up at -0.2%, from -0.4% in September, 2019, and the main refinancing operations rate will be increased in December, 2019. Earlier terms of changes in the ECB monetary policy will be a strong argument for the EURUSD uptrend recovery.

The Governing Council meeting in July will hardly suggest any changes in the ECB interest rate. The ECB announced everything or almost everything in June. The market doesn’t expect any surprises, though they can well occur. The maturity of the ECB bond portfolio is going to decrease in future, thus driving the long-term bond yield up. So, the regulator can follow the examples of the Fed, with its Operation Twist, or the Bank of Japan, targeting the yield curve.

Dynamics of the maturity of the ECB’s bond portfolio

Source: Bloomberg 

I, personally, doubt that Frankfurt will force the things. Featuring a mixed macroeconomic statistics, it will prefer to wait. On the one hand, a decline in the Euro-zone PMI suggests that it still has problems with GDP growth. On the other hand, an increase in CPI rate and consumer confidence index encourages the ECB hawks to go ahead. They will hardly do it. Most supporters of ceasing the ECB ultra-easy monetary policy are represented by pro-German lobby. In addition, Donald Trump’s criticism of German authorities and regular attacks on Berlin make them stay aside at the Governing Council’s meetings. German economy really looks to be one of the worst-affected by the US trade war with the EU.

In my opinion, the report on the US GDP in the fourth quarter on Friday seems a more important event than the ECB meeting. For a long time, the US economic expansion has been ahead its rivals and driving the USD index up. This factor is mostly priced in the EURUSD quotes, so, it can trigger buying out euro and push euro value up towards 1.18 and higher, amid the profit-taking.


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Price chart of EURUSD in real time mode

Euro Manages a Truce

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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