EUR/USD trend will be determined by trade wars and economic growth gap

The ECB meeting in March and the report on the US labor market in February have puzzled investors a lot. At first, it seems that Mario Draghi and his colleagues provided the EUR/USD bears with many advantages to draw the pair towards 1.1; but the bulls shouldn’t give up too early. Lower projected GDP at 1.1%, and the inflation rate down at 1.2%, reports about the LTRO launch in September and about the retaining the current interest rate through at least the end of the year look like using all the weapons they have. If the monetary expansion has reached its highs and the economy growth – its low, the euro fans should have the reasons for optimism.

Nobody knows for sure what is to happen tomorrow, but many are able to suggest future scenarios. Main problems of the euro area in the second half of 2018 resulted from foreign factors. When the export contribution to the GDP is over 40%, they have to react to the US-China trade conflict. The conflict de-escalation, on the contrary will drive the PMI up, along with the economy in general. Gradual adjusting of German car industry to new requirements of environmental protection will also be quite supportive for the euro. In the U.S., exhausting of the fiscal stimulus, traditionally bad for the second quarter weather/ government shutdown and negative impact of the revaluation on the export can seriously press the GSP growth down, which affects the bond market rates. The greenback is still responsive to the Treasuries yield; so, in this scenario (let’s call it optimistic) the EUR/USD pair can well meet the Bloomberg experts’ consensus forecast at 1.19 in late 2019.

 

Dynamics of US GDP and Treasuries yield

Source: Zero Hedge

After all, it is not necessary that the US economy will perform in the second quarter and later as bad as at the beginning of the year. If there are positive changes in the April-June period, the Fed will gradually be coming back to the dovish rhetoric, which will keep the currency pair within the middle-term trading range of 1.125-1.15 with high risks of its broadening up to 1.11 – 1.18. Anyway, the lowest volatility and the narrowest trading range for the entire time of the euro existence can’t last forever.

Unlike the neutral scenario, described above, the negative one will drop the EUR/USD below 1.1. If Donald Trump goes too far in the US-China trade relationships, triggering a new round of trade wars and further declining of global GDP growth, the euro-area challenges will come back. The euro fall can be accelerated if the trade war moves to Europe. The U.S. is going to Europe from Asia, and threatening with the boosted tariffs on the car imports may get a nice piece of cake like the EU farming industry. It is essential for Brussels, so the EU should equally retaliate. The PMI will be going down, the euro area may slide down into a recession, and the euro will go on falling down.


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Price chart of EURUSD in real time mode

Three paths for Euro

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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