Trade wars increase the risk of pulling down EUR/USD

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In recent days, the greenback has been strengthening in hopes that the trade war between Washington and Beijing will cause more damage to the economies of other countries than the US. However, it is hardly worth expecting that consumers and companies in the United States will be able to avoid problems.

"If the White House introduces 25% import duties on remaining Chinese goods worth $325 billion, then the net income of the companies in the S&P 500 index will fall by 1.5%. This will be quite enough to suppress investment activity in the corporate sector," said Morgan Stanley strategist Mike Wilson.

According to John Normand of JPMorgan Chase, the trade war could drive key US economic indicators to levels of recession.

"The risk lies in the fact that some important indicators that fall under the influence of the exchange of tariffs, approach crisis levels. These are industrial activity, business activity indices, capital costs and corporate profits, "said the expert.

According to UBS estimates, if the United States imposes tariffs of 25% on all Chinese imports, American GDP will lose 0.75-1% over the course of a year.

Against the dollar, the yen is near its lowest values since the beginning of February.

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According to experts of Mizuho Bank, the potential to pull down theUSD/JPY pair is limited.

"Technical indicators show that the greenback is oversold and the yen is overbought. Progress in the trade negotiations between Washington and Beijing could force Japanese investors to step up purchases of US currency, and foreign players to close longs in the yen," representatives of the bank said.

Citigroup analysts, in turn, believe that one should not underestimate the consequences of the escalation of a trade war between the two largest economies in the world.

"The development of a downward trend for USD/JPY under the prevailing conditions is the way of the least resistance. We believe that the idea of selling the pair with the expectation of a decline to 107.25 in the next two weeks is attractive. Moreover, the surge of volatility can return the rate to the level of 104," they said.

It should be noted that the last time the USD/JPY pair was trading near this level was back in January, when news of a slowdown in Chinese GDP growth caused a sharp reduction in short positions in the yen.

According to Citi, the new US tariffs could cut China's GDP by 0.5%, exports by 2.7%, and jobs by 2.1 million.

In addition to China, the United States is changing its trade policy with the European Union. In February, the US Department of Commerce submitted a report to Donald Trump with a positive opinion on the negative impact on the US auto industry by importing cars and foreign-made components. The head of the White House had 90 days to get acquainted with the report and deliver a verdict. Deadline expires next Saturday.

D. Trump can postpone the deadline, which Europeans and investors are hoping for, but could also introduce duties of up to 25% on imported cars and parts. Against this background, there is a rather high probability that euro traders can liquidate their positions before the decision is made by the US leader. This may create prerequisites for a decline in the EUR/USD pair in case support breaks at 1.1165-1.117.

The "soft" monetary policy of the ECB, which provides for maintaining low rates for a long time, is now taking the side of sellers of the pair.

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