EUR/USD holds onto gains near 1.1700 amid US-EU trade tensions

• EUR/USD trades firmly after Monday’s recovery move around 1.1700 despite escalating US-EU trade tensions.
• US President Trump has demanded an increase in the baseline tariff rate from 10% to 15-20% on imports from the EU.
• Both the ECB and the Fed are expected to leave interest rates steady in the policy meeting this month.

The EUR/USD pair clings to gains made on Monday around 1.1700 during the Asian trading session on Tuesday. The major currency pair strengthens as the US Dollar (USD) corrects sharply, following a fresh escalation in trade tensions between the United States (US) and the European Union (EU).

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat around 97.88 on Tuesday. The DXY has corrected from its almost a month high of 99.00 in the last two trading days.

Trade tensions between giant economies escalated after a report from the Wall Street Journal (WSJ) signalled that US President Donald Trump has demanded a higher baseline tariff in a range between 15% and 20% against 10%, which was being negotiated earlier. Additionally, Trump has been reluctant to reduce the 25% automobile levy.

This has forced EU officials to accelerate their plans of retaliation to safeguard their interests. In response, Germany — previously one of the more cautious voices in the bloc — has now aligned itself with France and others pressing for a tougher stance. As one German official told The Journal: “If they want war, they will get war,” Bloomberg reported.

On the domestic front, investors await the European Central Bank’s (ECB) monetary policy decision, which will be announced on Thursday. The ECB is almost certain to leave its key borrowing rates steady, while investors will closely monitor the monetary policy statement and President Christine Lagarde’s press conference to get cues about the likely interest rate outlook in the remainder of the year.

In the United States (US), traders are confident that the Federal Reserve (Fed) will keep interest rates on hold in the current range of 4.25%-4.50% in the policy meeting next week.