EUR/USD Flat Amid US-China Trade Deal Pessimism
- Beijing pessimistic over trade deal with the US
- US dollar stabilizes in anticipation of Fed minutes
- Euro unable to rally despite Eurozone optimism
Tuesday saw the EUR/USD trading flat at around $1.106 due to investor caution around the US-China trade talks. An increasing number of investors expected that the United States and China would come to an agreement and sign the first phase of a trade deal this month.
However, on Monday, investors were disillusioned. Reports showed that China was pessimistic about a deal with the United States. Beijing’s lack of confidence in the deal is the result of US President Donald Trump appearing to be reluctant to reconsider the tariffs being imposed on Chinese imports.
ING Bank’s Chief Economist and Head of Research Asia-Pacific, Robert Carnell, explains that as the schedule 4B list of extra tariffs draws closer to implementation – they are set to go into effect on December 15 – he doesn’t see a lot of progress being made towards a deal. Markets could become even more wary, especially considering that the tariffs are set to go into effect during the holidays.
Investors are cautious about the US dollar. The currency still rallied a little in comparison to the previous three days, which saw consecutive declines.
US dollar stability owed to anticipation of Fed minutes
Tuesday saw investors waiting for the Fed minutes to be released from their policy meeting at the end of October, at which time it was decided to reduce interest rates.
This “wait-and-see” approach allowed the dollar to steady. This was after experiencing three straight days of losses on the back of the US-China trade deal seemingly stalling.
If the minutes reveal that the Fed is taking a hawkish stance, some experts believe that it could mean recovery for the dollar.
However, others feel that the future doesn’t look bright for the currency. Morgan Stanley, for example, is worried about a glut on the horizon. Standard Chartered Plc warns that the growth of the monetary base in the United States could undercut the currency.
Morgan Stanley believes that one of the top trends to follow in 2020 will be a drop in the value of the dollar. This is based on stronger growth in the global economy outside the United States, but also a reduction in portfolio inflows.
Euro fails to rally – for now
Though the euro failed to rise against the dollar today, there is a lot of optimism around the shared currency. For example, Credit Agricole SA believes that the economic problems in the Eurozone might be over. This could mean that the worst has passed for the EUR/USD pair.
Morgan Stanley is also optimistic. Hans Redeker, Global Head of Strategy at the firm, stated that growth in the Eurozone is expected to accelerate. In the United States, though, expectations are that growth will decelerate. This will definitely help the EUR/USD because the market has relatively low expectations for the Eurozone.
Friday will see the purchasing managers’ indexes from the euro-area released. If these figures show that the Eurozone economies aren’t under as much pressure, the euro may see gains.
However, most analyst points have a caveat. If nothing comes of the US-China trade talks and the next round of tariffs are implemented, things could change significantly. If this were to occur, the global economy would come under pressure. This could lead to the US dollar gaining on the euro.
This is not helped by the fact that, as John Velis – a strategist at Bank of New York Mellon Corp – explains, the ECB is experiencing a lot of internal disagreement on monetary policy, leading to an unclear and stalled situation in the Eurozone.