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25.05.202012:59 Forex Analysis & Reviews: Eurozone conflict and US-China trade war poses threat on EUR/USD growth

Long-term review
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Exchange Rates 25.05.2020 analysis

It would seem that the joint initiative of Paris and Berlin to save the eurozone economy and the ECB's willingness to do everything possible to this end, contrary to the decision of the German Constitutional Court, will allow the main currency pair to throw off its shackles and rush up. However, the euro does not seem to be able to grow without the support of US stock indexes. The decline in the latter and the increased demand for safe haven assets have knocked the bulls out of EUR / USD.

Earlier, the S&P 500 index was confidently soaring due to expectations of the opening of the US economy as well as the faith in a V-shaped recovery of US GDP, and news about the creation of a vaccine against COVID-19. Now, it's obvious that the first factor has almost been won back, hopes for the second, on the other hand, are gradually fading and the timing of the third is rather vague.

Only 10% of global investors surveyed recently by Bank of America rely on a V-shaped recovery in the US economy. The rest believe that the weakness of the labor market, the reduction in investment, and the colossal fiscal stimulus, inflating the national debt, will restrain the country economic growth.

According to OECD studies, rich countries can take on an additional $ 17 trillion of debt, some of which are associated with a reduction in tax revenues due to the coronavirus pandemic. As a result, the total debt of developed countries will increase from 109% to 137% of GDP.

Obviously, without a vaccine against COVID-19, global GDP growth should not be expected. Coronavirus exacerbates pathologies that lead to a deterioration in the state of the global economy. Before the pandemic, the weakness of the latter manifested itself in China and the Eurozone, which were most affected by the Beijing and Washington trade war, as well as in monetary policy, which was super soft even without additional incentives.

Meanwhile, the tension in relations between the United States and China is increasing, which supports the dollar as a defensive asset.

Exchange Rates 25.05.2020 analysis

Beijing is trying to tighten legislative control over autonomous Hong Kong, which causes dissatisfaction with the White House. Meanwhile, China itself is also unhappy with the close ties between America and Taiwan.

In addition, the United States announced the withdrawal from the open skies treaty, which returns fears of a new round of the arms race. Although this may be a prologue to Donald Trump's new "great deal", fears about the next round of geopolitical tensions and fragmentation in difficult times for the global economy have intensified in the markets.

Recall that it was the combination of the economic downturn and the growth of protectionism that led to the Great Depression of the 1930s. And now, in politics, the direction of protectionism is intensifying, which further reduces global trade and undermines the potential for global GDP recovery.

According to experts, further escalating geopolitical tensions could return markets to a steady decline. Although it is unlikely that it will be as pronounced as in February – March, it can turn out to be much longer by returning the shares to the territory of the "bear" market.

The fact that the USA and China so far adhere to their obligations under the latest trade agreement remains a ray of light for investors, and this holds back the strengthening of the dollar.

However, pressure on the euro is exerted by expectations regarding the expansion of QE at the ECB meeting on June 4. According to the protocol from the April meeting of the Governing Council of the ECB, the regulator intends to avoid previous mistakes related to the loss of confidence in financial markets and is ready to increase the volume of asset purchases.

The situation of economic uncertainty in the Eurozone has been holding the EUR / USD pair in the 1.0750-1.1000 corridor for the second month. Last week, the pair first rose to the upper limit of this range, and then sank into its central zone, completing a five-day period near 1.0900.

Further rollback under 1.0900 will indicate the resumption of a downward trend. In this case, the main currency pair may move to horizontal support at 1.0845. Further, the target of the bears will be the mark of 1.0800 and below - support formed by a multi-week range near 1.0775. Its breakdown may become a fresh trigger for sellers and pull EUR / USD under 1.0700.

Meanwhile, a break of the 1.0900 mark will make the bulls target the resistance area of 1.0945–1.0950. Then they will take a course at 1.0975 and 1.1000. A confident breakthrough of the 200-day moving average, which is now located in the area of 1,1010–1,1015, will nullify the bearish mood in the short term and will contribute to further growth of the pair.

Viktor Isakov
Analytical expert of InstaForex
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