EUR/USD declines as US Dollar gains on hopes of easing US-China trade war
- EUR/USD falls to near 1.1350 as the US Dollar resumes recovery on increasing odds of de-escalation in the US-China trade war.
- Beijing is considering pausing additional tariffs on some goods from the US.
- ECB’s Holzmann warns about structural weakness in the Eurozone economy.
EUR/USD trades lower around 1.1350 during European trading hours on Friday. The major currency pair weakens due to a recovery move in the US Dollar (USD) on hopes of an improvement in trade relations between the United States (US) and China.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, resumes its upside recovery on Friday after correcting to near 99.20 the previous day. The USD Index rises to near 99.65 and aims to break above the weekly high around 100.00.
The confidence of financial market participants that the trade war between the world’s largest powerhouses could de-escalate has increased as China has signaled that it is considering suspending the 125% duty on imports of medical equipment and some industrial chemicals from the US, Bloomberg reported on Thursday.
This week, dialogues from the White House expressing optimism that Washington and Beijing could make a deal had stemmed hopes that the tariff war would not spiral further. On Tuesday, US President Donald Trump stated that “discussions with Beijing are going well” and added that he thinks “they will reach a deal”.
On the contrary, China has denied any discussions with the US. “There have not been economic and trade negotiations between China and the United States,” a spokesperson from Beijing said on Thursday. Additionally, China has clarified that the US needs to “completely cancel all unilateral tariff measures” if it wants trade talks.
On the monetary policy front, a chorus of policymakers has indicated that excessive uncertainty due to new economic policies by US President Trump could damage the economy. Minneapolis Fed Bank President Neel Kashkari warned on Thursday that the uncertainty posed by policies from the President could lead to “business lay-offs”. Kashkari ruled out the possibility that businesses have started cutting labor force but cautioned that some businesses indicate they are preparing for “possible job cuts if uncertainty continues”.
Daily digest market movers: EUR/USD drops while Euro remains firm
- EUR/USD edges down due to USD’s strength. The Euro (EUR) is up against its major peers, except North American currencies, on Friday, even though European Central Bank (ECB) dovish bets are bloating due to growing concerns that the Eurozone inflation could undershoot the central bank’s target of 2%.
- On Thursday, ECB policymaker and Finnish central bank governor Olli Rehn warned about downside risks to inflation. "It is quite possible that the projections for medium-term inflation under the current circumstances may well be below the 2% target,” Rehn said at the sidelines of the spring meetings of the International Monetary Fund (IMF) and World Bank. Rehn expressed confidently that the current situations “justify an interest rate cut in June”.
- During European trading hours, ECB policymaker and Austria’s central bank governor Robert Holzmann has shown concerns over structural weakness in the continent. Holzmann expects that fears of economic shocks will remain intact despite the tariffs announced by Donald Trump being lowered. “I see economic scars even if tariffs are lowered,” Holzmann said. Such a scenario also paves the way for monetary policy easing.
- The next trigger for the Euro would be headlines from the White House and the European Union (EU) about potential trade relations between both sides of the Atlantic.
Technical Analysis: EUR/USD falls to near 1.1350
EUR/USD drops to near 1.1350 on Friday. However, the outlook of the major currency pair remains bullish as the 20-week Exponential Moving Average (EMA) is sloping higher around 1.0885.
The 14-week Relative Strength Index (RSI) climbs to near overbought levels above 70.00 in the weekly chart, which indicates a strong bullish momentum, but chances of some correction cannot be ruled out.
Looking up, the psychological level of 1.1500 will be the major resistance for the pair. Conversely, the July 2023 high of 1.1276 will be a key support for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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