20.02.201902:36 Forex Analysis & Reviews: EUR/USD: roller coaster for the European currency

The euro/dollar impulsively fell to 1.1270 this afternoon, after which buyers seized the initiative and were able to turn the tide in their favor. But in general, the fundamental background remains quite unreliable for the single currency, and not only because of the release of disappointing macroeconomic data.

The fact is that the risk of a trade war between the US and the EU has increased again, and this fact exerts significant pressure on European markets. This issue was previously settled in the middle of last year, but recently began to receive alarming signals indicating the "militant" intentions of the White House. If this threat comes true, the European economy will feel a very painful blow, and traders will have to forget about raising the ECB's interest rate for at least the next year and a half.

I recall that in the early summer of last year, relations between the European Union and the United States has deteriorated significantly. Trump was dissatisfied with the trade policy, voicing his demands in the language of ultimatums. He said that he was ready to introduce 20 percent duties on cars and auto parts imported from the European Union, if the eurozone does not reduce or eliminate trade barriers against companies from the United States. The automotive industry in Germany, France and Italy was under attack – according to preliminary estimates, the total cost of the designated tariffs is 300 billion dollars. According to experts, in the event that US tariffs are introduced, there will be a "domino effect" : the business climate in the eurozone countries will deteriorate significantly, thereby slowing the growth of key indicators and the economy as a whole.

The European Union did not remain in debt and declared that in response it was preparing new duties on American goods, totaling $20 billion. The German foreign minister has even become personal, stating that Europe "will not allow Trump to speak the language of ultimatums with herself" and is able to respond with symmetrical economic measures. The situation was "hanging by a thread" from starting a trade war, and only thanks to the visit of the head of the European Commission in Washington, did the financial world manage to avoid a new round of trade confrontation.

The situated escalated again this year. Experts from the US Department of Commerce prepared and submitted a report to the American president regarding the import of cars to the United States from Europe. Over the next three months, Trump must make the appropriate decision: to introduce protective duties or not. Representatives of Brussels, in turn, again promised to introduce retaliatory duties on the import of American goods totaling 20 billion euros. However, according to most experts, the economy of the eurozone (and especially Germany) in any case will be in a more disadvantageous situation: for example, the export of German cars to the USA will be reduced at least twice the size.

Thus, the risk of a new trade conflict puts background pressure on the euro, especially after the release of fairly weak data on the growth of the sentiment index in the business environment of Germany and the entire eurozone from the ZEW Institute. Both indicators continue to be in the negative area, despite insignificant fluctuations in the direction of improvement. The uncertainty with Brexit, the slowing down of key macroeconomic indicators and the softening of the ECB's rhetoric - all these factors make investors nervous, which is reflected in general pessimism.

However, at the beginning of the US session, EUR/USD bulls were able to raise the pair and return its price to the 13th figure. This is due to two factors. First, the dollar index went down sharply today, responding to optimistic rumors about the prospects for a deal between China and the United States. In just a few hours, the indicator dropped from 96.95 to 96.52 points. Today, preliminary negotiations of representatives of working groups started, and at the end of the week, a dialogue at a higher level will be held with the participation of the US treasury minister, the head of the Ministry of Trade and advisers to the US president. The Chinese delegation is headed by Vice Premier Liu He. The leaders of both countries have already expressed optimism about the possible outcome of these negotiations, but the immediate reason for today's decline in the dollar was a newspaper publication, which stated that the White House is actually ready for a "great truce".

According to anonymous sources, in the presidential administration believe that the deal will help Trump to restore its rating, which significantly subsided after the well-known events with the prolonged shutdown. Although this information is unverified, many circumstantial evidence suggests a high probability of a truce. This fact puts pressure on the dollar and at the same time supported the European currency. In addition, the euro follows the pound, which is growing in optimistic rumors about tomorrow's meeting between Theresa May and Jean-Claude Juncker (at 16:30 London time). Once again, here we are dealing with unverified information, however, under the circumstances, traders are ready to believe even rumors, pushing the pound and the euro upwards.

Thus, the growth of the EUR/USD pair should now be treated with extreme caution (the same goes for the GBP/USD pair). The fundamental factors that triggered the growth of these currency pairs are unreliable, and the price dynamics themselves are impulsive. Any negative news about the prospects for the US-China talks or the prospects for Brexit could stifle this impulse and turn the price down. Long positions in the EUR/USD pair should be considered when overcoming the resistance level of 1.1370 (the middle line of the Bollinger Bands indicator on the daily chart).