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EUR/USD Rate Outlook Undermined by Fears of US-EU Trade War

EUR/USD Rate Outlook Undermined by Fears of US-EU Trade War

2019-12-05 05:40:00
David Song, Currency Strategist
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EUR/USD spiked to a fresh weekly high (1.1116) as the US ISM Non-Manufacturing survey narrowed more-than-expected in November, but the shift in US trade policy may undermine the recent rebound in the exchange rate as the Trump administration looks to raise tariffs on European goods.

The ongoing transition in US trade policy may have a greater influence on EUR/USD as the Office of the United States Trade Representative (USTR) announces that the Trump administration is “initiating a process to assess increasing the tariff rates and subjecting additional EU products to the tariffs.”

In response, French Finance Minister Bruno Le Maire warns that “the European Union would be ready to retaliate,” and growing tensions between the US and EU may drag on EUR/USD as it puts pressure on the European Central Bank (ECB) to further insulate the monetary union.

Nevertheless, the account of the October meeting indicates the ECB will retain the current policy at its last meeting for 2019 as Governing Council officials emphasized that “it was important to fully implement the September monetary policy decisions.”

Image of ECB interest rates

In turn, the ECB may merely attempt to buy time at its next meeting on December 12, but the central bank may continue to push monetary policy into uncharted territory in 2020 as the Governing Council struggles to achieve its one and only mandate for price stability.

As a result, EUR/USD may face a more bearish fate going into the year ahead, and fears of a US-EU trade war may produce headwinds for the Euro as “the Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”

EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

Keep in mind, the broader outlook for EUR/USD remains tilted to the downside as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly-low (1.0879) in October.

The recent correction in EUR/USD appears to have run its course as the advance from the yearly-low (1.0879) fails to produce a test of the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement).

The monthly opening range has been a key dynamic for EUR/USD so far in the fourth quarter as the exchange rate carved a major low on October 1, while the monthly high for November occurred during the first full week of the month.

In turn, the monthly opening range remains in focus, but the failed attempt to close above the 1.1100 (78.6% expansion) handle undermines the recent rebound in the exchange rate, with a move below 1.1040 (61.8% expansion) bringing the Fibonacci overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement) on the radar as it lines up with the November low (1.0981).

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Additional Trading Resources

For more in-depth analysis, check out the 4Q 2019 Forecast for the Euro

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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