The EUR/USD exchange rate is still flying high and trading above 1.1400. During all of Monday, it couldn’t get much above a few pips above this level. Despite some stability for the currency pair, it has been unable to attract meaningful investor interest. This surprising absence of interest leads to bigger questions in today’s global economic climate. As trade tensions between the United States and China flare up once again, market participants continue to be on guard.
The trade war between the US and China that began in early 2018. During that period, then-President Donald Trump implemented a number of trade barriers to curb China’s economic power. This unapologetic unilateralism energized the US-China trade war. It triggered a stormy period that brought notable impact on worldwide supply chains and economic security.
Historical Context of the Trade War
From the US-China trade war, to the pandemic and now the war in Ukraine, we’ve seen many interferences into almost every sector. Reduced consumer and business spending and investment, the result of tariffs imposed by both nations, have hurt consumers and businesses in both countries. Since the onset of the conflict, bilateral trade has been almost completely uprooted. It has sent shockwaves across the globe, raising inflationary pressure as seen by the Consumer Price Index.
In response to US tariffs, China has countered with tariffs on a wide range of American products such as cars and soybeans. Each of these moves not only ramped up tensions, but made future diplomacy much more difficult. Attempts to cool the trade flames went on, such as the signing of the US-China Phase One trade deal in January 2020. Huge challenges remain.
In addition to the hefty tariffs, the Phase One agreement did mandate China to make important structural reforms and correct its economic practices. Yet despite these claims, both countries have largely stuck to their guns, keeping sizable tariffs in place to restrict normal trade flows. After soliciting public input, in July President Joe Biden chose to keep most of those existing tariffs in place. To respond to this reality, he proposed new levies on groceries and other targeted products.
Current Developments and Market Reactions
As the US and China prepare for their next round of discussions, scheduled for Tuesday at 10:00 a.m. in London, market analysts are closely monitoring the situation. The result of these negotiations may have far-reaching effects on both countries’ economies and the global economy overall. Investors have an eye on possible changes in trade policies that might be expected, which makes this meeting especially enticing.
Despite the speculation enticing these discussions, the EUR/USD has proven to be a strong one, holding firmly over the 1.1400 mark. Yet, this notable absence of investor engagement leads to concerns about market confidence and future trajectory within this relatively new currency pair. Traders are probably waiting for clearer signals on the US-China relationship before taking big positions.
Outside political developments aside, external factors – in particular, high inflation rates and a host of other economic indicators – are driving current market behavior. The current trade situation has a direct effect on quite a few economic measures. Inflation should be the central consideration for policymakers on both sides.
Future Implications for Currency Markets
Going forward, analysts expect a change in US-China trade relations to lead to direct and quick repercussions for the currency market. But if tensions rise further or new tariffs go into effect investors will be quick to react. They will likely reduce their exposure in both the Euro and US dollar. On the flip side, if negotiations result in a positive outcome, that might help to restore confidence and bring more investment activity.
The stability of EUR/USD above 1.1400 should be a good gauge for risk-taking climate, in spite of these advances. As traders navigate this complex landscape, they must remain vigilant regarding geopolitical events and their potential repercussions on financial markets.