Homepage » News » EUR/USD » Latest US-China Trade Spat Escalation Limits Euro US Dollar (EUR/USD) Exchange Rate Momentum

Latest US-China Trade Spat Escalation Limits Euro US Dollar (EUR/USD) Exchange Rate Momentum

Fresh US Tariffs Limit Potential for Euro US Dollar (EUR/USD) Exchange Rate Gains

As the Trump administration unveiled a fresh 10% tariff on $200 billion of Chinese goods the trade dispute between the world’s two largest economies naturally escalated.

This limited the scope for any Euro to US Dollar (EUR/USD) exchange rate gains on Tuesday morning as confidence in the outlook of the global economy diminished.

However, as markets anticipated the imposition of more substantial tariffs the US Dollar (USD) ultimately struggled to capitalise on the news.

As analysts at Nomura commented:

‘Overall, the announcement today was broadly in line with our trade policy outlook. As our baseline economic forecast already expects 25% tariff on $200bn goods, whether in full or by instalments, this news is still within our expectations in terms of expected economic impact.

‘We see a notable risk that today’s announcement could lead to a material deterioration of business sentiment and the growth outlook.

‘Of course, China’s response is critical.’

If trade tensions continue to mount this could see USD exchange rates pushing higher on the back of market risk aversion, even as the risks to the outlook of the US economy increase.

EUR/USD Exchange Rate Muted as Markets Continue to Assess ECB Policy Outlook

Comments from European Central Bank (ECB) President Mario Draghi failed to offer any particular support to the Euro to US Dollar (EUR/USD) exchange rate, meanwhile.

As Draghi offered no fresh insight into the central bank’s policy outlook this left the Euro (EUR) generally lacking in momentum.

Tomorrow’s Eurozone construction output figures may put fresh pressure on EUR exchange rates, with forecasts pointing towards a loss of momentum in July.

Further evidence that the currency union is struggling to recover its lost economic momentum would give investors fresh incentive to sell out of the Euro.

Until Eurozone data starts to print more positively the ECB is unlikely to shift towards a hawkish policy outlook, keeping the prospect of an interest rate hike distant.

US Dollar (USD) Exchange Rates Vulnerable to Underwhelming Domestic Data

An increased degree of safe-haven demand could see the Euro to US Dollar (EUR/USD) exchange rate remain on a weaker footing in the days ahead.

However, demand for the US Dollar could falter further if domestic data continues to disappoint this week.

After the Empire manufacturing index weakened further than forecast USD exchange rates look vulnerable to any further downside surprises, as confidence in the underlying health of the US economy diminishes.

Signs of softness within the domestic housing market could weigh heavily on the US Dollar and weaken the case for the Federal Reserve to continue raising interest rates.

While the odds of a September rate hike are unlikely to diminish this is likely to only offer limited support to the US Dollar, given that an imminent move is already effectively priced into the currency.

A rebound in housing starts on the month, however, could see the Euro to US Dollar (EUR/USD) exchange rate come under fresh pressure.