Introduction to EUR/USD
The EUR/USD currency pair has returned below 1.1600 in the early European session on Monday, trading at 1.1590. This drop is attributed to concerns about the consequences of a trade war between the US and China, which has dampened risk appetite. Additionally, doubts about the success of France’s new cabinet remain, weighing on the Euro.
Impact of Trade War on EUR/USD
The US Dollar dropped on Friday after US President Donald Trump threatened 100% tariffs on Chinese imports, which was set to begin on November 1. This announcement was made after China announced curbs on rare earths’ exports. However, Trump softened his tone on social media on Sunday, suggesting that the additional levies will not come into effect, calming fears somewhat. Despite this, the Chinese authorities remain firm and have shown their willingness to retaliate if export levies are increased.
European Market Developments
In Europe, the focus remains on 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 parliament. Trading volumes might be lower on Monday due to the US markets being closed for the Columbus Day holiday.
Daily Market Movers
Several key factors have influenced the EUR/USD currency pair:
- Trump’s announcement to impose 100% tariffs on Chinese goods 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.
- China has defended its restrictions on rare earths’ trade to Western countries and the military industry, introducing countermeasures if the 100% levies announced by Trump are applied.
- On Sunday, US President Trump eased concerns of a full-blown trade war with soothing comments on social media.
- The US Michigan Consumer Sentiment Index posted a 55.0 reading for October, slightly below September’s 55.1, yet above market expectations.
- The economic calendar is light on Monday, with the most relevant event being a meeting of G20 finance ministers and central bankers, where ECB President Lagarde will participate.
Technical Analysis
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, suggesting 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 1.1545 and 1.1560.
Understanding the Euro
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone, setting interest rates and managing monetary policy. The ECB’s primary mandate is to maintain price stability, which means controlling inflation or stimulating growth.
Factors Influencing the Euro
Several factors influence the Euro, including:
- Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP)
- Interest rates, with relatively high rates compared to counterparts benefiting the Euro
- Economic data releases, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys
- Trade Balance, measuring the difference between what a country earns from its exports and what it spends on imports
Conclusion
In conclusion, the EUR/USD currency pair has dropped below 1.1600 due to concerns about a trade war between the US and China and doubts about France’s new cabinet. The technical analysis suggests that the pair is under bearish pressure, with a confirmation below the previous intraday lows increasing pressure towards the October 9 and 10 lows. Understanding the factors that influence the Euro, such as inflation data, interest rates, economic data releases, and Trade Balance, can help investors make informed decisions about the currency pair.
