EUR/USD is down due to the concerns that the USA may cross the line in the trade talks with China

Turmoil in financial markets due to the US-China trade talks, growth-gap and the dovish rhetoric of the centrals banks competing with the Fed support the USD rally. Since 1970s, the USD has only 11 times been rising for 9 days and more. It may be the 12th time in February. At the same time, the euro is pressed down by the negative Brexit influence on the euro-area GDP, rumours about the extension of the ECB monetary stimulus and the concerns about Germany’s sliding down in recession. The EUR/USD rate touches the bottom of the trading range of 1.1265-1.1485 and the bears really hope to press it through.

Although, the US administration reported that Donald Trump is willing to meet with Xi Jinping really soon, the markets are cautious about the information around the US-China trade talks. Yes, the US president has many times changed his decisions (he was going to talk with the Chinese president both in late February and in March), the private meeting proves nothing. The USA may cross the line, affecting the crucial issue, Beijing's strong support for state-owned enterprises. Even if Trump is willing to strike a deal, and China is not interested in the conflict escalation due to a decline in its economy growth, but once the red line is crossed, the war will be resumed. The concerns about it press down the yuan. The yuan fall, taking into account the close correlation of China and the euro-area export, is one of the factors, pressing the EUR/USD down.

Dynamics of yuan and euro

  

Source: Trading Economics

A decline in foreign demand, political and geopolitical risks hold the euro-area economy back. In addition to China, the euro-area important trade partner is the UK, whose GDP rate in the fourth quarter, affected by Brexit, has declined to the lowest level on an annual basis for a decade. The pound, sliding down, is followed by the euro. Especially since both German or French economies have hardly expanded by more than 1.5% each. Germany is about to slide in technical recession in the October-December period. There is an obvious contrast with the USA, with its strong retail sales, recovered US Manufacturing PMI, inflation close to its 2% target and strong labour market. Is it surprising that EUR/USD is being sold?

Dynamics of GBP and EUR

  

Source: Trading Economics

The weakness of the euro-area economy is reflected in the ECB soft course. After the Fed has abandoned aggressive monetary restriction, the ECB deliberately sounds dovish; otherwise, it may trigger the euro strengthening, that is not to the advantage of either the central bank or European exports. I personally don’t think that it should resume the LTRO, but the rumours about it worry the euro fans. The breakout of the support at 1.1265, may press the EUR/USD down towards 1.118 and 1.11. The bears’ winning series looks impressive, a tiny fear will encourage a part of them to take the profit, which will result in the correction.


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Price chart of EURUSD in real time mode

Will dollar cross the red line?

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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