Euro holds up well as trade tension flare up roils markets

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13 May 2019


The politics of US-Chinese trade negotiations are back with a bang, driving moves in financial markets worldwide.

e think there are two key takeaways from last week’s currency moves. First, emerging market currencies held up relatively well. With the exception of the Turkish Lira, which suffers from specific domestic problems, the major ones held their losses against the Dollar to 1% or less.

Another key development is that the Euro was one of the few currencies to gain against the Dollar, joining the traditional safe havens like the Japanese Yen and the Swiss Franc. Market positioning against the common currency is extreme, and the news flow from actual economic data has turned clearly positive in the Eurozone; it seems like the path of least resistance for the Euro for now is up.

Market-moving data will be scarce this week. We expect headlines from the US-China trade negotiations to drive trading. The key will be to see if the Euro manages to keep it grinding upwards. We expect this to be the case, especially if we get another positive data surprise in industrial production on Tuesday.


Economic data out of the UK continues to defy Brexit uncertainty. First quarter growth rebounded from 1.4% to 1.8% year-on-year.

Figure 1: UK GDP Growth Rate (2010 – 2019)

Markets are not expecting any dramatic near term breakthrough in the May-Corbyn Brexit negotiations, the steady stream of positive economic surprises is having an impact and last week helped Sterling maintain, just barely, the 1.30 level against the US Dollar in spite of the negative trade news.

This Tuesday we look to the employment report to confirm the modestly positive outlook and provide further support to the Pound.


The gap between weak business service data, stronger real production and activity numbers closed a little bit last week in the Eurozone when the PMI services survey was revised modestly upwards.

The key event for the Euro is whether the US imposes auto tariffs before this weeks deadline. We do not expect this to happen, though traders generally expect it to be the case. Should we be proved correct, we should see an additional upward move in the common currency later in the week.


This week we have only second-tier data releases out of the US. The greenback should be driven entirely by trade tension headlines, as well as by upcoming speeches from Federal Reserve officials.

We do note that the Dollar has rallied less than 0.5% in trade-weighted terms since the bombshell tariff announcement over the previous weekend, which indicates markets are not yet seriously concerned about a possible collapse in negotiations or the permanent extension of the tariffs that came into effect last week.