FX markets contemplate US-EU trade deal – Commerzbank

The trade deal between the US and the EU, announced on Sunday evening, was a major talking point in the markets yesterday, Commerzbank's FX analyst Michael Pfister notes.

US Dollar benefits from the likelihood of a decreased recession risk

"Opinions varied significantly. Some analysts emphasised that the EU had allowed itself to be taken advantage of and had not exploited its strengths effectively. Others argued that the deal reflected the EU's internal divisions and the balance of power in its relationship with the US, and was therefore the best possible outcome."

"The FX market made its view clear yesterday: EUR/USD fell by more than one and a half cents, dropping below 1.16 again. Roughly half of this was due to a stronger US dollar, and half to a weaker euro. This is consistent with my boss's arguments yesterday that the US dollar has benefited from the likelihood of a decreased recession risk. Conversely, the euro is probably suffering due to the imposition of tariffs of 15%, despite recent low expectations. This has brought the problems of the euro area back to the fore."

"It remains to be seen, though, whether the lower EUR/USD levels will last. Tomorrow's Fed meeting should demonstrate that political pressure from the US government is gradually having an effect, with several interest rate cuts likely to follow starting in September. By then, the US dollar should also have started to weaken again."