Equity markets from London to Lisbon and from Athens to Amsterdam are up. They’re cheering every time news breaks about a new trade agreement between the US and any of its score of trading partners. Investors have responded with enthusiasm to a recently reached Joint Comprehensive Plan of Action, indicating optimism that the agreement will unlock economic opportunities. The euro, on the other hand, has experienced very subdued swings. That likely means that traders had already priced in a good deal of the deal’s effects in prior sessions.
Many market analysts noted that even the rumblings of this trade deal created considerable investor enthusiasm. Despite all this excitement, the euro has not moved much. In fact, market participants were already expecting the announcement of an agreement even before it was formally announced. So much so that they’d already built it into their rates. The euro on the whole has been doing pretty well. Traders are obviously holding out for some catalyst that will increase its value.
In the next week, major economic indicators will come out that might further set the euro’s future course. On Wednesday, advance release second quarter Gross Domestic Product (GDP) data will be released. So, these numbers will provide key context to the ongoing economic performance and recovery of the Eurozone. Additionally, this Friday we’ll get the inflation data for July. This data is particularly important, as it provides a foundation for assessing price stability and the overall economic health of the metro area.
The European Central Bank (ECB) is widely expected to keep a dovish tone in its next Council meetings. Analyst opinion is largely in favor of the ECB staying pat for at least the next two meetings. We want to look at the effects of the trade deal and the pending economic data. There is increasing market expectation that the ECB has completed its current cycle of interest rate cuts. They’ve suggested they have no immediate plans to cut rates again.
In all three of these scenarios, the euro will still be determined primarily by the aftershocks from the US trade deal. As always, traders will be watching to see what this agreement actually does. Separately, they hope to see it help improve economic conditions within the Eurozone and worldwide. The interaction between trade relations and economic indicators would risk increasing currency market volatility.