Home Forex Strategy Limited Upside EUR In US–EU Trade Conflict – Action Forex

Limited Upside EUR In US–EU Trade Conflict – Action Forex

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Following mid-2018 talk between US President Donald Trump and European Commission President Jean-Claude Juncker that avoided duties on EU car imports to the US, the story now resumes. Last week’s Security Conference in Munich showed that EU–US relations are eroding over the Iran deal, US disengagement in Syria and, again, auto tariffs.

The worst-case – imposition of tariffs – would hurt the euro. Trump has a 90-day period to act, allowing time to avert the worst. Maybe the EU can go the way of Canada and Mexico, which are among the top 5 car exporters to the US and benefit from the USMCA agreement that confers duty-free on 2.6 million cars per year for each member. Currently trading at 1.1309, EUR/USD is heading along 1.1325 short-term, as US market remain closed due to President’s Day and liquidity will remain low.

Trump is considering EU car tariffs along 20-25%. This would hit EU GDP growth and the single currency, because auto-related trade accounts for 10% of US–EU transactions. Germany has the most at stake; the EU economy as a whole remains highly exposed. Targeted industries would be automotive, steel and aluminium, also chemicals and textiles. The outcome for the US would be higher average vehicle prices of USD 2’750 and a threat to 367’000 US jobs in auto and related industries.

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Fed watching

This Wednesday should bring news of the US Federal Reserve’s normalization strategy. The Fed’s January meeting dropped its tightening bias. Yet with interest rates on hold for now, investors will watch balance sheet management. Chairman Jerome Powell suggested the bank was near to settling a strategy for balance sheet roll-off. January meeting minutes could time the release of an updated Policy Nominalization Principle and Plans (PNPP): this would confirm the Fed is in a sustained holding pattern. Headwinds around GBP and EUR in Brexit fears and soft economic data mean that gains against the greenback are unlikely at this point. Play the range 1.1200-1.1500 in EUR/USD.

Today’s US holiday will keep trading subdued. The news flow remains dominated by old stories that refuse to move out of the way: trade tensions, Brexit and US political chaos. Perhaps this is why we are seeing buyers stepping back into Bitcoin. Or perhaps it is the surprise issuance of the JPM Coin. Additional Fed dovishness should also support cryptos.

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