Image © kasto, Adobe Stock

- Euro unlikely to be derailed by US-China trade war

- Dollar underperforming as US economic outperformance fades

- UniCredit back EUR/USD to go higher medium-term

The EUR/USD exchange rate can go higher in the medium-term as the single-currency displays an immunity to ongoing US-China trade tensions and expectations for US economic outperformance to fade.

Tariff wars are back in focus at the time of writing; yet the Dollar has not strengthened to any notable extend allowing the Euro-to-Dollar exchange rate (EUR/USD) to retain a constructive feel.

EUR/USD is quoted at 1.1683 at the time of writing, while the Dollar is the second-worst performing major currency of the past week; only the ultra-safe-haven Yen is doing worse.

The foreign exchange market reaction to the latest announcements on trade from the US appears to be more muted than in the past; the reaction suggests markets have had a enough time to digest the latest moves by the US and China, and therefore it is only new news that will really matter.

The Office of the United States Trade Representative announced a 10% tariff will apply on $US 200 billion of imports from China on24 September.

The 10% tariff is smaller than the 25% markets had initially feared, this could also explain the market's lacklustre reaction.

However, the tariff rate will rise to 25% on 1 January 2019.

The US already applies a 25% tariff on $50BN of imports from China. The latest set of announcements brings the total to $250BN (about half of US goods imports from China).

The Chinese government indicated it will retaliate against the US announcement.

President Trump warned the US would apply tariffs on another $267BN of imports from China if the Chinese government retaliates.

"EUR-USD is still trading at the upper end of the 1.15-1.17 band in spite of the announcement of new tariffs against Chinese imports by the US Administration," says Roberto Mialich, an FX Strategist with UniCredit Bank in Milan.

"Experience so far this year suggests that any escalation in the US trade row

tends to be USD positive, but we do not think that the common currency is likely to be completely derailed now that Washington has raised pressure on Beijing as the euro has so far proved quite able to face headwinds," adds the analyst.

US Data no Longer USD Supportive

The US economy continues to perform incredibly well, but when it comes to moving currency markets it is the surprise factor that matters - when data is beating expectations the biggest currency moves are seen.

The problem for Dollar bulls is that US data is running out of room to surprise, if anything some mean reversion must take place i.e. data releases must fade back to levels consistent with longer-term economic growth rates.

This might undermine the Greenback.

"US data have been more mixed recently and momentum appears to have peaked, although it remains solid," says Dennis Tan, a foreign exchange strategist with Barclays.

Tan says the US economic outperformance and expectations of Fed hikes, including one on September, still portend for USD outperformance in the medium term.

"However, positioning remains long and a correction can weigh on the dollar if the recent relatively positive trade headlines and softer data continue," adds Tan.

UniCredit's Mialich is also wary that the clear outperformance of US data relative to the rest of the world might lose its potential to driver further Dollar gains:

"Given fears of an economic slowdown in the US, investors are also progressively scaling back their assessment of the chances of strong monetary tightening over time beyond the two rate hikes expected by the end of this year," says the analyst.

UniCredit remain optimistic on the Euro's prospects against the Dollar going forward, particularly in the medium-term.

"We acknowledge that both the US trade row and uncertainty over the fiscal expansion in Italy may represent a cap in the near term, but we also remain quite constructive on EUR/USD over the medium-term," says Mialich.

UniCredit believe EUR/USD resilience to the downside has been reconfirmed by the latest IMM data on non-commercial commitment, revealing that in the week ending 14 September, investors returned net long EUR/USD for the second week in a row with over 11k positions compared to less than 8k at the start of the month.

"In the meantime, the US press also reports that American companies are taking their time to repatriate their cash from abroad, notwithstanding the new tax law introduced by the Trump administration, and this may deprive the USD of an additional source

of support, albeit temporary," adds Mialich.

Advertisement

Get up to 5% more foreign exchange for international payments by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here