Euro at the Mercy of US-EU Trade Tensions Again. US Dollar to Rise?

Euro, US Dollar, EU-US Trade Tension, Trade War, Coronavirus, EUR/USD Technical Analysis – TALKING POINTS

  • Euro at risk as renewed EU-US trade tensions threaten to derail regional stabilization
  • Coronavirus recession may magnify geopolitical shock, push haven-linked USD higher
  • EUR/USD’s impressive rise could come to an end as the pair shows signs of hesitation

EU-US Trade Tensions Haunt Euro Amid Fear of Rising Coronavirus Cases

The Euro appears to be once again haunted by a familiar but foreboding specter: EU-US trade tensions; and the timing could not be worse. Europe continues to wrestle with the coronavirus pandemic at a time when the region’s growth prospects were already dwindling from lingering geopolitical tensions over the past two years.

Global Growth Took a Hit From US Trade War With China, EU

Chart showing Global Trade

Source: OECD

Late on Tuesday night, the United States announced it is weighing imposing tariffs amounting to approximately $3.1 billion worth of exports of goods from Spain, Germany, France and the UK. The list of products include olives, gin, beer and trucks with considerations of adding additional tariffs on goods ranging from yogurt to aircrafts.

The announcement came shortly after European officials announced they were considering banning American travelers from entering the region on the basis of poor virus-containing management. Following a 16-year dispute over accusations of illegal subsidies for Airbus SE and Boeing by the EU and US respectively, the World Trade Organization (WTO) announced a ruling last year in favor of the US.

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It awarded Washington the right to legally impose up to $7.5 billion worth of tariffs against Europe, though these new duties will likely only be enforced in September. Around the same time, the WTO is expected to publish a ruling on the EU. This will determine whether they will be allowed to legally impose duties totaling $11.2b worth of goods against the US in retaliation for illegal subsidies to Boeing.

Sources close to the matter report that some of the tariffs may be as high as 100 percent, and officials in Brussels have expressed concern that the policies “might even go beyond what is authorised under the WTO”. Even more concerning is US Trade Representative Robert Lighthizer’s suggestion of employing a so-called “carousel retaliation”.

This would involve periodically shifting tariffs on varying groups of goods in Europe as a method of applying pressure across a wide range of businesses. For a region already afflicted with internal geopolitical strife, greater uncertainty at a time when the signs of stabilization were just beginning to bloom could result in an aggressive selloff in the Euro and regional equities.

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Consequently, much like what was seen in 2018 and 2019, escalated EU-US trade tensions could pressure the Euro while simultaneously pushing the haven-linked US Dollar higher. Only now, the fundamental circumstances are far more dire than before, and this circumstantial change could amplify risk-off market dynamics. Consequently, the tension could end up erasing EUR/USD’s recent gains over the past few weeks.

EUR/USD Technical Analysis

EUR/USD’s cooldown period following its remarkable ascent in early June may soon turn into a pullback. The pair’s decline may encounter some downside friction at around 1.114, but if that floor cracks under the weight of sellers it could open the door to retesting a key inflection range between 1.0989 and 1.0981. At those levels, bearish momentum may accelerate and could result in deeper losses for EUR/USD.

EUR/USD – Daily Chart

Chart showing EUR/USD

EUR/USD chart created using TradingView

— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitriTwitter