EUR/USD holds previous gains as trade fears weigh on the US Dollar
- The Euro holds gains above 1.1600 after bouncing from two-month lows near 1.1540.
- Fears that the US trade rift with China might escalate are weighing on the US Dollar.
- In Europe, investors remain cautious, awaiting news from France's new cabinet.
EUR/USD stands comfortably above 1.1600, trading at 1.1615 at the time of writing on Monday, as the latest trade rift between the US and China has hurt the US Dollar, and the US federal government remains closed with little prospects of an upcoming solution.
The US Dollar dropped on Friday after US President Donald Trump threatened 100% tariffs on Chinese imports to begin on November 1, after the Asian country announced curbs on rare earths' exports. Trump, however, softened his tone on social media on Sunday, suggesting that the additional levies will not come into effect, which has calmed fears somewhat.
Meanwhile, in Europe, the focus remains in France, where President Emmanuel Macron reappointed Sébastien Lecornu as Prime Minister, one week after his resignation. Lecornu has named Macron's close ally, Roland Lescure, as Finance Minister, who will have the challenging task of passing a belt-tightening budget through the parliament.
Trading volumes might be somewhat lower on Monday as the US markets are closed for the Columbus Day holiday. In the economic calendar, a slew of central banks' policymakers, including European Central Bank (ECB) President Christine Lagarde, will provide the fundamental guidance.
Daily digest market movers: Concerns about a trade war have dented the US Dollar's recovery
- Trump's Friday announcement to impose 100% tariffs on Chinese goods from November 1 revived fears of a new trade war escalation between both countries, triggering a moderate reversal in the US Dollar and allowing the Euro to recover from its lows. The US president calmed fears on Sunday with a soothing comment on social media, but the Chinese authorities remain firm and have shown their willingness to retaliate if export levies are increased.
- China has defended its restrictions on rare earths' trade to Western countries and the military industry, and the Commerce Ministry said they were introduced in the talks held in Madrid last month. The ministry also added that they are not afraid of a possible trade war and that they will introduce countermeasures if the 100% levies announced by Trump are finally applied.
- On Sunday, US President Trump wrote on Truth Social: "Don't worry about China, it will all be fine! Highly respected President Xi just had a bad moment.". These comments have eased concerns of a full-blown trade war, but markets are likely to remain cautious, awaiting further developments.
- On Friday, the US Michigan Consumer Sentiment Index posted a 55.0 reading for October, slightly below September's 55.1, yet above the market expectations of further deterioration to 54.2. The US Dollar reacted positively to the news.
- The economic calendar is light on Monday. The most relevant event will be a meeting of G20 finance ministers and central bankers, where ECB President Lagarde will participate, at the IMF/World Bank annual meeting in Washington.
Technical Analysis: EUR/USD's bearish pressure eases above 1.1600
EUR/USD is building up after returning and confirming above the 1.1600 level. The broader trend remains bearish, but the Relative Strength Index (RSI) on the 4-hour chart is attempting to return above the 50 level, and the Moving Average Convergence Divergence (MACD) is trending higher, which suggests that a further correction is likely.
Intra-day support is right below the 1.1600 level, which is keeping the pair afloat on Monday. Below here, negative pressure would return, and bears would target the October 9 and 10 lows in the area between 1.1645 and 1.1660 ahead of the base of the descending channel, at the 1.1525 area.
Immediate support is at the descending channel bottom, as seen on the 4-hour chart since mid-September, and Thursday's low near 1.1540. Further down, the August 5 low, near 1.1525, would be the last support area ahead of the August 1 low, at 1.1392.
US-China Trade War FAQs
Generally speaking, a trade war is an economic conflict between two or more countries due to extreme protectionism on one end. It implies the creation of trade barriers, such as tariffs, which result in counter-barriers, escalating import costs, and hence the cost of living.
An economic conflict between the United States (US) and China began early in 2018, when President Donald Trump set trade barriers on China, claiming unfair commercial practices and intellectual property theft from the Asian giant. China took retaliatory action, imposing tariffs on multiple US goods, such as automobiles and soybeans. Tensions escalated until the two countries signed the US-China Phase One trade deal in January 2020. The agreement required structural reforms and other changes to China’s economic and trade regime and pretended to restore stability and trust between the two nations. However, the Coronavirus pandemic took the focus out of the conflict. Yet, it is worth mentioning that President Joe Biden, who took office after Trump, kept tariffs in place and even added some additional levies.
The return of Donald Trump to the White House as the 47th US President has sparked a fresh wave of tensions between the two countries. During the 2024 election campaign, Trump pledged to impose 60% tariffs on China once he returned to office, which he did on January 20, 2025. With Trump back, the US-China trade war is meant to resume where it was left, with tit-for-tat policies affecting the global economic landscape amid disruptions in global supply chains, resulting in a reduction in spending, particularly investment, and directly feeding into the Consumer Price Index inflation.
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