EUR/USD has returned below 1.1600 in the early European session on Monday and is trading at 1.1590 at the time of writing. Investors’ concern about the consequences of a trade war between the US and China has dampened risk appetite, while the doubts about the chances of success of France’s new cabinet remain weighing on the Euro (EUR).
The US Dollar dropped on Friday after US President Donald Trump threatened 100% tariffs on Chinese imports to begin on November 1, after the Asian country announced curbs on rare earths’ exports. Trump, however, softened his tone on social media on Sunday, suggesting that the additional levies will not come into effect, which has calmed fears somewhat.
Meanwhile, in Europe, the focus remains in France, where President Emmanuel Macron reappointed Sébastien Lecornu as Prime Minister, one week after his resignation. Lecornu has named Macron’s close ally, Roland Lescure, as Finance Minister, who will have the challenging task of passing a belt-tightening budget through the parliament.
Trading volumes might be somewhat lower on Monday as the US markets are closed for the Columbus Day holiday. In the economic calendar, a slew of central banks’ policymakers, including European Central Bank (ECB) President Christine Lagarde, will provide the fundamental guidance.
Daily digest market movers: Concerns about a trade war have dented the US Dollar’s recovery
- Trump’s Friday announcement to impose 100% tariffs on Chinese goods from November 1 revived fears of a new trade war escalation, triggering a moderate reversal in the US Dollar and allowing the Euro to recover from its lows. The US president calmed fears on Sunday with a soothing comment on social media, but the Chinese authorities remain firm and have shown their willingness to retaliate if export levies are increased.
- China has defended its restrictions on rare earths’ trade to Western countries and the military industry, and the Commerce Ministry said they were introduced in the talks held in Madrid last month. The ministry also added that they are not afraid of a possible trade war and that they will introduce countermeasures if the 100% levies announced by Trump are finally applied.
- On Sunday, US President Trump wrote on Truth Social: “Don’t worry about China, it will all be fine! Highly respected President Xi just had a bad moment.”. These comments have eased concerns of a full-blown trade war, but markets are likely to remain cautious, awaiting further developments.
- On Friday, the US Michigan Consumer Sentiment Index posted a 55.0 reading for October, slightly below September’s 55.1, yet above the market expectations of further deterioration to 54.2. The US Dollar reacted positively to the news.
- The economic calendar is light on Monday. The most relevant event will be a meeting of G20 finance ministers and central bankers, where ECB President Lagarde will participate, at the IMF/World Bank annual meeting in Washington.
Technical Analysis: EUR/USD is under bearish pressure below 1.1600
EUR/USD has failed to remain above the 1.1600 level and is under bearish pressure again. The Relative Strength Index (RSI) on the 4-hour chart has been capped below the 50 level, and the Moving Average Convergence Divergence (MACD) is now turning lower, which suggests that the rebound from Friday’s lows has lost steam.
A confirmation below the previous intraday lows around 1.1590 increases pressure towards the October 9 and 10 lows in the area between 1.1645 and 1.1660 ahead of the base of the descending channel, at the 1.1525 area. To the upside, resistance is at the mentioned intraday high of 1.1630. Further up, the top of the descending channel comes at the 1.1690 area, and next is the area between 1.1720 and 1.1730, where price action was capped on October 6.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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