EUR/USD Flat Amid US – France Trade Concerns

Alan Penny

3 December 2019

4 min read

EUR/USD forex trading

  • France receives backlash from tax on US digital services
  • Washington proposes tariffs on French exports
  • US escalates trade tensions on a global scale
  • Positive US economic data and upcoming ECB meeting could see the EUR/USD slide

The EUR/USD traded flat on Tuesday as markets grew cautious over the sudden trade issues that arose between the United States and France.

At the time of this writing, the EUR/USD is trading at 1.0811, indicating minor movements from the day’s open of 1.10792.

US reacts to French digital services taxation

The euro had a tough time on Tuesday after investors heard the news that the Trump administration is considering applying tariffs to French goods worth $2.4 billion.

the Trump administration is considering applying tariffs to French goods worth $2.4 billion.

Washington announced their intention Monday, leading to a EUR/USD flat trade response. This is likely a retaliatory move against France’s decision to implement a new tax on digital services.

Thus, digital companies that earn revenues exceeding EUR 25 million in France and EUR 750 million on a global scale will have to pay a 3% tax. The goal is to force companies to pay some taxes in Europe, even if they are declaring their profit in another country.

The Trump administration, however, is against the tax, calling it unfair discrimination against big tech companies from the United States, like Google, Facebook, and Amazon.

Euro struggles on worries of US taxes on French goods

US Trade Rep Robert Lighthizer announced the proposals. He explained that the USTR’s focus is on counteracting the protectionist policies more EU states are implementing. The US administration considers that these policies are unfair to US firms, either “through digital services taxes or other efforts that target leading US digital services companies.”

Lighthizer stated that the US government is also considering whether they should conduct investigations into similar digital taxes practiced by Italy, Austria, and Turkey. The same proposed taxes in Canada and the UK weren’t mentioned.

The list of proposed products that will be taxed includes champagne, handbags, cheese, and more. All these products could face tariffs as high as 100%.

On Tuesday, President Trump stated that if France would tax other people’s products, then the US would tax them too. He also stated the EU treated the US unfairly on trade. Thus, he wouldn’t let France take advantage of US companies.

According to Reuters, Bruno Le Maire, the French Finance Minister, stated that the threat from the United States was not acceptable. He also explained that the tax wasn’t specifically targeted at American firms.

Le Maire stated that if the United States were to go through with the threat, France and the EU would retaliate. The European Commission backed Le Maire by saying the EU would act as a single entity. However, they also stated that disputes should be settled at the World Trade Organization.

EUR/USD flat due to more tariffs

The Trump administration also levied new tariffs on Brazil and Argentina, targeting steel and aluminum. After the French tariff announcement, investors are becoming increasingly worried about the Trump administration’s actions.

Investors feel that these trade tensions could lead to even more protectionist policies. This could have a detrimental effect on the US economy. It could also lead to the Fed further cutting the interest rate in the coming year.

EUR/USD could slide on US data and ECB meeting

The EUR/USD could slide depending on the results of the various upcoming US economic data releases. Of these, the US payroll is expected to have the most influence. If there’s a strong employment expansion, it’s likely that the US dollar will strengthen.

The euro could face some pressure with the upcoming ECB meeting scheduled for December 12. It’s the first ECB meeting with Christine Lagarde as president.

According to UBS, it’s likely that Lagarde will focus on unifying the Governing Council. There is little expected to change in terms of policy. In fact, UBS expects little will change in the next two years.

In terms of forecasts, UBS expects growth in 2020 to be reduced from 1.2% to 1.1% and headline inflation to rise to 1.3%.

Written By
Alan Penny

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