USD: The US-China deal – Commerzbank

Source Fxstreet

The US dollar depreciated yesterday following the weaker-than-expected US inflation figures and the EUR/USD exchange rate was able to rise towards its April high this morning. At this point, I could spend a long time pondering whether the reaction was justified, pointing to explanations for the continued lack of inflationary impetus from US tariffs and attempting to interpret the figures from the Fed's perspective, Commerzbank's Head of FX and Commodity Research Thu Lan Nguyen notes.

Downside potential in EUR/USD is therefore likely to remain limited

"There was something entirely else that was remarkable about the whole movement yesterday: the ignoring of the news about an agreement in the tariff conflict between the US and China. This left the exchange rate virtually cold. The risk of the dispute between the two economic powers escalating again should now be significantly lower following the agreement, which in itself would be positive for the dollar."

"One could argue that an agreement had already been in the offing after the talks in London and that yesterday's confirmation was therefore no longer news. However, the dollar had not been able to benefit from this prospect at the beginning of the week either. This leaves us with the following explanation: this 'deal', like the one with the UK before it, is nothing more than hot air from the market's perspective. In fact, the status quo in terms of tariffs has merely been confirmed - the only new elements are mutual promises to facilitate trade in selected critical goods."

"The likelihood is increasing that the other US trading partners will also be unable to secure any concessions on the reciprocal tariffs announced at the beginning of April by the end of the 90-day-pause - no matter how hard they try. This is bad news for the dollar, especially as the reaction pattern of USD exchange rates appears increasingly asymmetrical. On the one hand, positive developments are hardly supporting them. On the other hand, stronger rate cut speculation since yesterday has weighed on the dollar. The downside potential in EUR/USD is therefore likely to remain limited for the time being, whereas there is still plenty of scope to the upside."


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