EUR/USD bulls couldn’t go on their attack due to the problem of German’s manufacturing industry

The first increase in the Eurozone PMI in five months enabled EUR/USD bulls to draw the pair’s quotes up to the weekly high. They couldn’t advance higher due to the problems in manufacturing industry and worries about trade conflict escalation between the USA and the EU. Donald Trump threats with new 20% tariffs on the European car imports if Brussels doesn’t cancel its tariffs on imports, worth €2.8. The US president has regularly emphasized the disparity between the 2.5% tariff the U.S. currently charges for car imports and the 10% duty imposed by Europe. Although, he forgets that the U.S. imposes a 25% tariff on imports of light trucks, compared to Europe’s 10% rate for those vehicles.

In 2017, the EU exported 1.3 mln of vehicles, covering about 7% of all vehicles sold in the U.S.  According to the Peterson Institute, if Washington imposes 25% tariffs on all vehicles, and Brussels follows through with retaliatory tariffs, it will cut the US car production by 5%, and employment will be 4% down. A full-blown trade war with 10% tariffs all over the world will reduce global GDP by less than 2 %. It is not that bad as tabloids try to present. But there is little good as well. German companies are very sensitive to trade tensions between the USA and the EU: manufacturing PMI hit its eighteen-month low in May, followed by the Eurozone composite indicator. But for a good rise in the services PMI, EUR/USD bulls couldn’t have dreamt about a counterattack.

Dynamics of Euro-area PMI

Source: Bloomberg

Composite PMI rebound up from its lows brought back the idea of gradual restoration of the Euro-area economy. The confidence in its prosperous future will encourage the ECB to abandon QE in 2018. According to 58 Reuters experts, QE will hardly be extended through longer than late 2018; 60% of the respondents described the risk of it as “very low”. Consensus forecast for the Eurozone GDP was lowered to 2.3% for 2018, from 2.3%, and that for 2019 was kept unchanged (+1.9%). As the main reasons for lower expected GDP, the analysts named Italy, Brexit and trade wars.

Escalation of the conflict between the USA and China can encourage the ECB to ease its monetary policy. The People’s bank of China didn’t put the business off and cut some banks' reserve requirements by 0.5 bps. That released about $108 billion in liquidity and contributed to the yuan devaluing. USD/CNY hit the highest level since earlier this year. May be, that is the retaliation, China holds for the USA?

Dynamics of yuan

Source: Bloomberg.

If EUR/USD bulls can’t consolidate above level 1.1645, the quotes grow more likely to fall down towards 1.161, 159 and 1.157. The euro rebound up from the levels will enable buyers to go ahead for a new counter attack. To restore the short-term downtrend, it is necessary to break through level 1.1525


 

Germany Sets Euro Back

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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