The hopes of investors for an early conclusion of a deal that would put an end to the trade confrontation between the two largest economies in the world have not yet been realized. The next round of talks between the American and Chinese representatives ended last Friday without a trade agreement.
However, the lack of a deal is also a result. The signing of the agreement seems to be postponed until better times. It is possible that it could be before the June G20 summit in Japan. China has about three weeks to rectify the situation. It is assumed that after this period, tariffs in the amount of 25% on the import of Chinese goods worth US$ 200 billion into the US will earn in full power.
Given the fact that the euro fell in 2018 amid growing trade tensions in the world, we can only wonder at its resilience.
On the one hand, American protectionism leads to a reduction in world trade, slowing the growth rate of Chinese and European GDP. On the other hand, the introduction of trade tariffs provokes price increases, that is, it accelerates inflation. According to some estimates, if the trade war between Beijing and Washington continues for two years, consumer prices in the United States may accelerate by 0.2–0.4%.
Most likely, the Fed will perceive the potential rise in inflation as a temporary phenomenon, while a 10-15% decrease in the S&P 500 index against the background of escalating trade conflict can be a serious argument in favor of easing monetary policy on the part of the regulator. At the moment, the derivatives market estimates the probability of a decrease in the federal funds rate this year at 66%.
However, the stability of the "bulls" position on EUR/USD is explained not only by expectations regarding monetary expansion in the United States. A large-scale monetary stimulus in China improved macroeconomic statistics not only in the PRC, but also in Germany. This is evidenced by the positive data on industrial production and foreign trade of the latter. According to experts, in the first quarter the GDP of the leading economy in the eurozone expanded by 0.4%. This allows the euro to strengthen on rumors.
If we add to this the closing of positions by carry traders in the assets of developing countries, the growth of EUR/USD seems quite logical.
According to a consensus forecast of analysts recently surveyed by Bloomberg, by the end of this year, the euro could rise to $1.18 against the dollar. However, the escalation of the US and PRC trade wars, the increase in the budget deficit of the latter, and the weakening of the effect of fiscal and monetary incentives in China can make significant adjustments to this forecast.
In addition, it should be remembered that the United States has claims in the trade sector not only to China, but also to its European partners. This week, the deadline for Washington's decision to raise duties on car supplies from the eurozone to the United States will come to an end. It is possible that amid difficulties in the trade discussions with China, the American side would prefer not to increase pressure on Brussels, however, the likelihood of increasing trade duties on European cars in the near future will be a risk factor for the euro.
It is assumed that in the event of the return of the relevance of the US-EU trade dispute, the EUR/USD pair may return to the mark of 1.11.
