20.05.201907:39 Forex Analysis & Reviews: EUR / USD: China and the European Parliament are in the spotlight

Despite the abundance of macroeconomic reports and planned speeches by representatives of the ECB and the Fed, the euro-dollar pair will focus on political fundamental factors this week. The focus will be on Italy, China and the European Parliament elections. Factors such as the intentions of Italian politicians, the prospects for the US-China trade negotiations and the results of the European elections will determine the degree of anti-risk sentiment in the market.

Let's start with China. Let me remind you that on Friday, the Chinese state-owned media published the news that Beijing could withdraw from the negotiation process with Washington. As reported by the press, the Chinese side "does not see the sincere intentions" of the Americans to find a compromise and conclude a mutually beneficial deal. According to representatives of China, the States profess a policy of trade protectionism that impedes negotiations. Although this information was of an informal nature, it was obvious to all that the state publications of the PRC could not publish such a message without the knowledge and consent of the authorities. A bit later, the official position of Beijing appeared, which was somewhat veiled.

Thus, according to a senior Chinese diplomat, Wang Yi, China is still ready to resolve differences through negotiation "but countries must be on equal footing." He also added that Washington should "change the direction of its actions" since China will "firmly defend its national interests." The Chinese reaction is understandable after the introduction of additional duties while the White House introduced a state of emergency in the information and communication infrastructure in the country, which allowed the US Department of Commerce to add Huawei and 70 related companies to the "blacklist" that prohibits the use of US components and technology.

In other words, it will become clear this week on what direction the further relations between the US and China will develop. If Washington strengthens the anti-Chinese policy, Beijing will most likely come out of the negotiation process and the financial world will be on the verge of another escalation of the trade war. In this case, the dollar will again enjoy the status of "island of security", dominating in all currency pairs. In this situation, only one exception is permissible: if the Chinese decide to withdraw from the US government debt or significantly reduce their share in this market. Given this situation, the dollar will be in the role of the victim, not the "protector." China owns US $1.13 trillion in US Treasury bonds, therefore, any more or less large-scale actions in relation to these securities will have the effect of a bombshell in the financial world. Yet according to experts, such a scenario is unlikely at least in the context of retaliation in a trade war. At the same time, the Chinese can take this step if the yuan goes to a "steep peak" against the background of possible US actions. In this case, China can reduce investments in these assets by several tens of billions of dollars, according to experts polled by Bloomberg. However, currently, the dollar can significantly weaken only on rumors of similar intentions on the part of the PRC.

Yet, the single currency this week will respond to the results of elections to the European Parliament, which will be held from 23 to 26 May. According to surveys, the next European Parliament (which will operate until 2024) will maintain a pro-European liberal-democratic majority. Sociologists react saying that political forces "constructively and consistently advocate for strengthening European unity and oppose populism and radical ideas" will receive from 450 to 500 seats. Thus, the European People's Party should retain its leading position while the Progressive Alliance of Socialists and Democrats is predicting the second place. Lastly, the Greens and representatives of the Alliance of Liberals and Democrats for Europe will compete for the third place.

At the same time, the extreme right and euro skeptics (which is mostly the same) can also strengthen their presence in the European Parliament. Thus, the Europe of Nations and Freedoms Party (Marine Le Pen) can double its presence in the new parliament, gaining 60–65 seats instead of the current 37. 45-50 seats (in the current convocation 41). But left-wing political forces can weaken their positions by reducing their presence in the EP from 52 to 40 members. In general, if the real numbers differ from the above in the direction of the right (Euro-skeptics), then the euro will be under considerable pressure.

Thus, the fate of the EUR/USD pair will depend on global processes. If China finally "slam the door", the dollar will rise in price across the entire market (unless the Chinese touch on the topic of US public debt). In addition, the downward trend of the pair will continue if the right strengthens its presence in the European Parliament, reflecting the electoral preferences of Europeans. In the event that these fundamental factors are resonating, the euro-dollar pair will test and possibly consolidate within the framework of the 10th figure. Otherwise, the price will return to the usual range of 1.1130-1.1240.