EUR / USD: trade war does not allow the dollar to grow, but the euro is in no hurry to strengthen

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Last week, Greenback updated its multi-month highs, but ended with a decline against most major currencies.

This reversal, apparently, made many think about what happened.

The dollar, considered a safe-haven asset, usually responds by reinforcing the risk aversion, the indicator of which is the fall in the value of stocks and oil prices. However, this time, the USD rate was falling along with Wall Street and oil, not paying attention to the growth of treasury yields.

Why is everything turned upside down?

According to experts, the reasons should be sought in the dual nature of the dollar. On the one hand, it acts as a defensive asset that investors turn to when global risks increase. On the other hand, greenbacks are the national currency, and they buy it when they believe that the American economy is stronger than the rest. However, the protracted trade war between Washington and Beijing makes investors increasingly doubt that the United States will win, other things being equal, which is why the dollar falls along with stocks and raw materials.

"There is a thin line somewhere between the dollar as a defensive asset, which is bought as soon as the word "tariff" shakes the air in the market, and the dollar, which should pay attention to how the prospects of the American economy, are tied to a trade conflict that threatens to develop into a technological cold war." analysts say.

However, the recent decline of the "American" also found a quite banal explanation: closing long USD positions at the reached maximums on the threshold of a three-day weekend in the USA and the UK. That is, market participants simply decided to cut the dollar "longs" to reduce risks. It is assumed that in the coming days, Greenback will be able to play all back.

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EUR/USD spent most of the past week in a narrow range. The maximum range of its fluctuations did not exceed 45 points.

The turning point was the publication on Thursday of releases on business activity in the EU and the USA. All indicators turned out to be worse than expected, but if European statistics showed only local deterioration, the American data came out rather disappointing. Against this background, the EUR/USD pair stopped the downward trend and returned above the 1.12 mark.

One of the key topics at the opening of this week was the results of elections to the European Parliament.

According to preliminary data, a group of representatives of eurosceptics (Le Pen bloc in France, the Italian League of the North, the British movement Brexit, right-wing conservative ESPD) managed to get more seats than in the 2014 elections, but most seem to remain with the united group of Euro-optimists and centrists.

It is expected that the EU will continue to pursue a policy of integration in the face of a common threat in the form of American protectionism, which means that there is no need to worry about the collapse of the currency bloc.

At the same time, the health status of the eurozone economy still raises questions. The latest data on business activity and business climate signal a slowdown in the region's GDP.

Before the May "tweets" of the head of the White House Donald Trump about raising tariffs for Chinese imports, a foundation was created for restoring the upward trend in the euro. It would seem that the economies of the Middle Kingdom and the Eurozone began to grope the bottom, and investors became confident that Washington and Beijing would soon end the trade war. However, in late spring, the situation changed radically.

Apparently, the time for a confident rally of EUR/USD has not yet arrived, so it makes sense to rely on the medium-term consolidation in the range of 1.1-1.15.

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The material has been provided by InstaForex Company - www.instaforex.com