EUR/USD: Trade deal to provide support… down the road - Danske Bank

According to analysts from Danske Bank, a China-US trade deal would support the EUR/USD pair in a 3-6 month period after a muted initial reaction.

Key Quotes: 

“Looking back at the past year’s price action in EUR/USD, it is tempting to conclude that the war on tariffs in spring 2018 was a key factor in taking EUR/USD down from close to 1.25 (h 20). We stress, however, that trade tensions came at a time when other unrelated factors also weighed: (1) the Chinese cycle was already faltering following the crackdown on shadow banking during 2017, and (2) the Italian election led to a fiscal-expansion plan laid out in May that reintroduced a debt risk premium on the euro.”

“On announcement of a deal, we expect the market to initially send EUR/USD higher. The knee-jerk reaction is likely to be dominated by a brightening China outlook, reduced euro zone downside risks, and a reduced scope for ECB easing; further, the potential for euro equity inflows is also a short-term positive.”

“We doubt that a trade deal would cause EUR/USD to break out of the recent range around 1.13. On a 3M horizon, the direction for EUR/USD will depend on the deal details, i.e. how much US goods would China buy, and would Trump go after the EU next with, e.g., auto tariffs? The potential for the Fed to sound more upbeat and disappoint current dovish pricing and the still-high carry on short EUR/USD positions also weigh in to provide a rather muted positive outlook for EUR/USD short term.”

“We continue to see EUR/USD in a muted recovery towards 1.17 in 12M as the EUR-positive factors dominate and the risk of new ECB easing fades.”