The EUR continues to trade lower this week despite Trump’s Friday announcement that tariffs on EU automobile imports to the US would be delayed by six months.
Trump recently stepped up the trade war with China by raising tariffs on $200 billion of Chinese goods from 10% to 25%. He was also planning on raising tariffs on EU and Japanese automobile imports to the US.
However, China retaliated with its own 25% tariffs on $60 billion of US goods. And it seems that the US has decided not to exacerbate worsening global trade relations once again.
Trade Wars Heating Up
Trump recently announced that he was considering similar 25% tariffs on auto imports from Japan and the EU. However, given the potential for both these economic areas to retaliate with their own tariffs, Trump has instead opted to delay the tariffs for 180 days.
Similar to last year, global markets cascaded lower in response to the fresh outbreak of tit for tat trade tariffs between the US and China. So, instead, the US will now engage in trade negotiations with both the EU and Japan to address the imbalance in automobile imports.
Trump Cites National Security Threat
When Trump announced an investigation into the automobile imports from these countries, he explained:
“Under current circumstances, this action is necessary and appropriate to remove the threatened impairment of the national security”.
The President also added:
“The United States defense industrial base depends on the American-owned automotive sector for the development of technologies that are essential to maintaining our military superiority”.
US Trade Secretary Robert Lighthizer will now have 180 days to report back to the president.
What is Driving EURUSD?
So, with the tariffs having been avoided for now, why is EURUSD still trading so heavily?
Part of the reason is that the market never seemed to fully price in the tariffs. The majority of the market focus was on the escalating trade tensions between the US and China. In fact, many banks had been expecting that such a delay would be likely.
Furthermore, the direct impact of any such tariffs, though negative, would likely be limited. This is because FX flows from the goods trade in EURUSD are diluted by financial flows.
The main issue driving EURUSD continues to be concerns surrounding the health of the eurozone economy. The manufacturing recession which has gripped the economy over the last year, as well as subdued inflation, have kept the ECB’s hands tied when it comes to policy normalization.
Implications for the ECB
The ECB has been able to formally end its QE program as of the start of the year. However, the planned Q3 rate hikes projected toward the end of last year have now been pushed out into 2020.
As of now, there are concerns that should the tariffs eventually come into play, in six months time, the eurozone economy might suffer. The tariffs would squeeze growth at a time when the ECB has barely any policy room left to manage the situation. This would leave a lower EUR as one of the only viable options for loosening financial conditions in the eurozone.
EURUSD continues to trade lower within the bearish channel which has framed price action over the last months. The sell-off has taken price down through the 1.1153 support zone as of today. This puts focus on a test of the 1.1129 level next, where we also have confluence with the bearish channel low. For now, focus remains on further downside unless we see a meaningful reversal above 1.1184.