EUR/USD Likes The Trump-Xi Deal, But Can It Hold?

  • EUR/USD is trading on higher ground after the trade truce.
  • Progress on Italy also helps ahead of significant US events.
  • The technical picture is improving for the pair.

EUR/USD is back to the upper end of the range, above 1.1350. The pair opened the week with a Sunday gap after US President Donald Trump and his Chinese counterpart Xi Jinping agreed on a 90-day truce in the trade wars. The leaders of the world’s largest economies decided not to impose new tariffs and intensify talks on a long list of issues from trade practices, through the forced appropriation of technologies, Intellectual Property, fentanyl (a deadly opioid) flowing from China to the US, and more. China also agreed to buy “substantial” amounts of US agricultural goods.

Markets are rallying on the news, and the risk-on atmosphere triggered a sell-off of the safe-haven US Dollar. However, it is important to note that there are discrepancies between the statement that came out of the White House and that coming out of Beijing. Also, the long list of US grievances will be hard to resolve in 90 days. Trade accords usually take a long time to negotiate. Nevertheless, markets remain happy at the moment.

Another positive development comes from Italy. The euro zone’s third-largest economy continues its climb down from the planned budget deficit of 2.4%. After the coalition leaders signaled that the deficit of 2.4% is “not set in stone,” talks continue with Brussels. Commissioner Vladis Dombrovskis said there is a different tone from Rome. The spread between Italian and the benchmark German bonds remains below 300 basis points.

Brexit is a bit more complicated, but luckily for the Euro, the effect is minimal. The British press reported that the legal advice on the Irish backstop describes Britain being “indefinitely trapped” in the customs union according to the Irish backstop. The publication hinders the chances of UK PM Theresa May to pass the Brexit deal in Parliament on December 11th.

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