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EURUSD: Trade Wars and Tariffs, ECB Outlook and Technical Analysis

EURUSD: Trade Wars and Tariffs, ECB Outlook and Technical Analysis

Nick Cawley, Strategist

EURUSD – Prices, News and Technical Analysis

  • Trade wars and tariffs back on the US-EU menu.
  • US may also question the current level of EURUSD.

The latest IG Client Sentiment Indicator shows retail are 53.7% long EURUSD yet recent positional changes give us a mixed trading outlook.

The DailyFX Q3 Forecasts and Analysis of USD and EUR are available to download here.

EURUSD Sensitive to Trade War News

The contentious EU-US trade war continues and is likely to drive EURUSD in the short-term as US President Donald Trump welcomes European Commission President Jean Claude-Juncker to Washington today. Talks will be focussed on ongoing trade tensions - not helped by President Trump tweeting ‘Tariffs are the greatest’ on Tuesday – with the US looking for both sides to drop all tariffs. The EU currently impose a 10% tariff on US automobiles - five times more than the US currently imposes on EU autos – and the US has said they will slap on a 20% automobile tariff shortly if this differential is not addressed. The US recently imposed tariffs on EU steel and aluminium.

EU Budget Commissioner Guenther Oettinger tried to smooth the path Tuesday when he said that the EU would look at ways to reduce tariffs with the US adding that the EU ‘want to avoid a further escalation of the trade conflict, and to avoid a trade war’. This however may become increasingly difficult to achieve, especially with the current lowly rate of the euro against the dollar. President Trump recently tweeted that both China and the EU have been ‘manipulating their currencies and interest rates lower’ taking away the US competitive edge'.

EURUSD a Victim of Widening Interest Rate Differentials

The divergent monetary policy path of the two currencies is accentuating the problem between the US and the EU and it is likely to continue. The US 2-year currently yields a multi-year high around 2.65% while the 2-year German equivalent continues to trade with a negative yield, currently -0.615%. This differential continues to weaken EURUSD, a bone of contention with US President Trump. The latest ECB monetary policy meeting on Thursday will see all rates left unchanged while the next Fed meeting is expected to see interest rates raised by another 0.25%, the third hike this year. ECB President Mario Draghi will be questioned about the current EURUSD exchange rate at tomorrow’s post-announcement press conference and he will need to tread a careful path to avoid annoying the US further.

EURUSD currently trades just below 1.1700 and has bounced off the 1.1500-1.1530 area four times in the past two months indicating that there may be some kind of central bank ‘line in the sand’ at this level. Fibonacci resistance at 1.1710 will be vulnerable to a positive outcome between the EU and US today leaving the July 9 high of 1.1791 the next target.

DailyFX trading instructor Tyler Yell recently released a Tactically Bearish EURUSD technical analysis targeting 1.1300.

EURUSD Daily Price Chart (November 2017 – July 25, 2018)

EURUSD: Trade Wars and Tariffs, ECB Outlook and Technical Analysis

If you are new to foreign exchange, or if you would like to update your knowledge base, download our New to FX Guide and our Traits of Successful Traders to help you on your journey.

What’s your opinion on the EURUSD? Share your thoughts with us using the comments section at the end of the article or you can contact the author via email at Nicholas.cawley@ig.com or via Twitter @nickcawley1

--- Written by Nick Cawley, Analyst

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

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