Fiber is in focus this week after continuing to score impressive gains this month. But strong moves like that often are followed by corrections. What should traders be looking out for, or is there a good chance the move can continue?
The EURUSD trend has seen the Euro gain over 5 big handles (or over 5%) since the end of last month, in the fastest rise since 2009. The factors pushing this move come from both sides of the Atlantic, and are part of a complex interplay. The events that have gained the most headlines, naturall, are trade and the recent change in posture by the ECB. But with those likely already priced in, does that mean their effect on the market is now over?
EURUSD Trend: What’s Really Pushing the Market
What happened most recently to push the EURUSD to its latest high was the imposition of reciprocal tariffs by the European Commission on the US. The White House went through with its 25% global tax on steel and aluminium, which would have an impact on German steel exports to the US. The EU is targeting up to 428 billion in US exports, ranging from bourbon, to textiles and Harley Davidson Motorcycles.
In making the announcement of the tariffs, European Commission President Ursula von der Leyen said, “Prices will go up. In Europe and in the United States.” Which sounds like a problem for the central banks who were just getting around to bringing inflation towards target, which has allowed for the recent easing in both the US and Europe.
The Diverging Reactions
Typically, the imposition of tariffs strengthens the currency, so it’s no surprise the Euro got stronger. But the dollar got weaker at the same time, aiding in the EURUSD’s upward move. If both applied tariffs, why did one’s currency get weaker and the other’s stronger?
The application of tariffs was long expected, and investors worry that the growing trade war will slow down the economy. Markets already anticipated a slower EU economy, but it seems that the US is heading into a rough patch as well. This has caused concern in the markets, leading to large inflows into the relative safety of US dollars, pushing down yields. Meanwhile, European countries are planning unprecedented defense spending which has pushed up yields on Euro bonds.
Can the Move Continue?
One of the things that put a wobble in the Euro lately was the announcement that progress had been made on a peace deal in Ukraine. If peace does materialize, it could reduce the urgency for defense spending, and lower yields on benchmark German debt. However, this appears to be a secondary issue compared to tariffs.
There have been some signs of conciliation on the trade front, with the White House first threatening and then withdrawing additional tariffs on Canada in response to increased cost for electricity. A draw down of the trade tensions would likely reassure markets, and could get risk appetite going. That would give the dollar a boost. However, with the trade war still in full swing, the dollar could remain on the backfoot. Unless there is some strong data to reassure traders that the US economy won’t be adversely affected in the near term.
