EUR/USD Dollar: Forewarned, Forearmed?

Reuters experts warn Washington about the future effects of trade wars

A chain is no stronger than its weakest link. Donald Trump is going to win the US presidential elections in 202o and he needs to correct the U.S. protectionism as soon as possible. According to 113 Reuters experts, the probability of the US economic recession in the next two years is up at 35%, the most pessimistic forecast suggests 75%. Trade wars can really slow the US economy down 2% in late 2019. According to Oxford Economics, if the US new import tariffs, suggested by Donald Trump, worth $267, come into effect, the US GDP rate is going to lose about 1 bps in late 2019. The projections of the Fed and the U.S. House Budget Committee suggest the U.S. GDP rate at 2.4%-2.8% for the same period. Taking into account the potential losses, it looks worse than the consensus forecast of the economists, interviewed by Reuters.Probability of the U.S. economic recession


Source: Reuters

The experts’ pessimism mostly results from the U.S. opponents’ retaliatory measures, which create serious problems for the US foreign trade. Nomura believes that China may introduce the quotes on the U.S. imports and expand the tax deductions to support the local companies, damaged by the U.S. protectionism. In particular, according to JP Morgan, the amount of the VAT refund may be increased for exports.

The dollar tendenancy to the trade war escalation also results from the fact that the markets are tired of trade battles. Everybody understands that Donald Trump isn’t going to stop, and China is likely to retaliate. The most common idea in the market is that the USD rally, started in April, is coming to an end. The dollar exchange rates already include four hikes of the Fed’s rate in 2018 and the US potential tariffs on 100% of China’s imports. But the fact that many countries can benefit from the U.S. trade battle with China is still quite fresh. In fact, if the USA imposes tariffs, targeting one country, it provides favorable conditions for other states. According to the Institute for Economic Research (IFO), the Euro-area may become the main beneficiary of the U.S. trade war with China; the goods, imported from the Eurozone, have become cheaper for the U.S. consumers than the Chinese ones.

Investors’ lower demand for the U.S. dollar, results from a slowdown in the U.S. corporations’ repatriation of the offshore profits as well. In the first quarter, they returned to the USA about $294 billion, in the second one – $169.5 billion, in the third quarter, according to Wall Street Journal projections, the amount of the repatriated cash will be down to $143 billion. In the short-term, the greenback can be supported by the soon FOMC meeting. The issue of increasing the Fed funds rate up to 2.25% has been almost decided (the derivative market suggests it be 94% likely); so, EUR/USD bulls are not that willing to go ahead and storm the resistances at 1.171 and 1.175. They will rather play back the fact. If the Fed doesn’t sound that hawkish, speculators may start selling off the dollar.

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