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According to Jane Foley, Senior FX Strategist at Rabobank, the surprisingly upbeat headlines from yesterday’s meeting between Trump and European Commission President Juncker have come as a relief, with German exporters most likely among those breathing the largest sigh of relief.  

Key Quotes

“Having rallied late in the European session yesterday, EUR/USD has slipped modestly this morning ahead of the ECB policy meeting.”

“Although the EUR is a freely floating currency, the weaker fundamentals of the Eurozone relative to Germany mean that for years German exporters has been working with an exchange rate which is weaker than a deutschemark would be.”

“It is no surprise then that today German officials have welcomed yesterday’s US-EU trade initiative which Economy Minister Altmaier has hailed as a breakthrough.”

“Today’s statement from Juncker says that the US and EU will “work towards zero tariffs on industrial goods”. He also said that the “EU will build more terminals to import liquefied natural gas from the US” and that “the European Union can import more soybeans from the U.S.”   Politically this sounds like a win for Trump in a week in which USD12 bln worth of subsides were offered to US farmers to offset the pain caused by an increased in Chinese tariffs on US agricultural produce such as soybeans.”

“While it appears that there is something for both sides in this plan, there is reason for China to suspect that the EU is aligning with the US in a way that could impact its competitiveness. Trump stated that the US and EU “will therefore work closely together with like-minded partners to reform the WTO and to address unfair trading practices, including intellectual property theft, forced technology transfer, industrial subsidies, distortions created by state-owned enterprises, and overcapacity”.   This may be the real win for the US from yesterday’s meeting.”

“China has already started to stimulate its domestic economy in an effort to offset the impact of trade wars.”

“For the EUR, the relaxation of trade fears between the EU and US is a positive factor. That said, there is little reason to suspect that the ECB have sufficient motivation to alter policy from the course that it has already been set.”

“The recent improvement in the tone of some Eurozone economic data releases and the encouraging level of demand supports the Governing Council’s commitment to end QE this year, but core inflation is still relatively subdued and insufficient to spark real talk of a rate hike before the summer 2019 guidance that has been provided.”

“Given the widespread expectation that the Fed will hike rates again in September, interest rate differentials remains in favour of the USD.   This reason, combined with the fact that a China slowdown could enhance the pressures on emerging market supports our view that the USD uptrend still has further to go.   We see EUR/USD at 1.14 on a 6 mth view.”