Weekly Euro Forecast: US-China Trade War Sparks Recovery; Eurozone Inflation Due

 

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FUNDAMENTAL FORECAST FOR THE EURO: BULLISH

  • “One man’s trash is another man’s treasure.” In a similar vein, the US Dollar’s woes due to the escalating US-China trade war leave the Euro in a place to benefit.
  • Overnight index swaps are currently pricing in an 89% chance of a 10-bps rate cut at the September ECB meeting, while there is an 84% chance of 20-bps of rate cuts by the end of 2019.
  • The IG Client Sentiment Index suggests that the current EURUSD price trend may soon reverse higher despite the fact traders remain net-long.

EURO RATES WEEK IN REVIEW

The Euro finished last week broadly higher, with most of its gains coming on Friday amid a flurry of headlines around the US-China trade war. With Federal Reserve Chair Jerome Powell failing to provide the dovish succor that US President Donald Trump sought after, the US quickly retaliated to the Chinese imposition of 5% to 10% tariffs on $75 billion of imported US goods.

By announcing a step-up of existing US tariffs on $250 billion of imported Chinese goods to 30% from 25% on October 1 and placing a 15% tariff (as opposed to a 10% tariff) on anadditional $300 billion worth of Chinese imported goods on September 1, US President Trump has escalated the US-China trade war in a materially significant way.

While the US tariffs were announced after markets closed on Friday, EUR-crosses were able to begin pricing in the eventuality thanks to a series of tweets from the US president. EURUSD closed the week higher by 0.48%, but resulted from a 0.53% on Friday (negating the week’s losses otherwise) in the form of a bullish key reversal on the daily timeframe; the scope for more gains is clear.

Elsewhere, with the latest Brexit news suggesting that there may be an avenue for compromise between the EU and the UK, the British Pound was able to scrape back some of its recent losses, and EURGBP closed lower by -0.47%, the worst performing EUR-cross on the week.

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