EUR / USD: "Tomorrow was a war", euro declines on EU-US trade conflict fears

Last week, the European currency received support from the European Central Bank. On the one hand, it softened the parameters of monetary policy. But on the other hand, it showed indecision in this matter, minimally applying an accessible arsenal of actions. Simply put, the market expected more from the ECB, however, the existing split of opinions among regulator members did not allow them to satisfy the needs of the EUR/USD bears. Against this background, the pair tested the 11th figure on Friday, while maintaining the potential for further corrective growth. But this week, the euro has new problems and more precisely, the "well-forgotten old." We are talking about the prospects of exacerbating the trade conflict between the US and the EU. Judging by the rhetoric of the European Commissioner for Trade, Cecilia Malmstrom, Donald Trump will soon "open the second front" of the trade war - now with Brussels.

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Let me remind you that Washington voiced its claims back in April of this year. According to the White House, some European countries (namely France, Italy, Spain, and Germany) illegally subsidized the European aircraft manufacturer, Airbus, concerned in causing the US worth $11 billion in annual damage. n response, the States threatened to introduce additional duties that would be imposed on helicopters, motorcycles, aircraft, food and alcohol products from the above European countries.

Trade negotiations on this issue were postponed for a long time. Brussels could not agree on the candidacy of a negotiator. After numerous disputes, which lasted many months, the representatives of the Alliance countries agreed to give a mandate for negotiations to the European Commissioner for Trade Cecilia Malmstrom. Negotiations were supposed to begin in January this year, but some countries (such as Spain, France, and Italy) opposed the candidacy of Malmstrom as a negotiator. After months of negotiations, Brussels decided to abandon the principle of unanimous approval and replaced it with "majority consent."

But in the end, the dialogue with Washington never began (neither at the beginning of Summer nor at the beginning of September), which was announced yesterday by Malmstrom adding that the States did not show a desire to negotiate. In her opinion, Trump will follow the same strategy as with China. At first, he introduces duties or announces them with the exact date of introduction, and then sits at the negotiating table. The European Commissioner acknowledged that, apparently, new fees are "expected soon."

This phrase crippled the European currency. After all, Trump will most likely not limit himself to duties on alcoholic beverages. The issue of introducing duties on European cars and spare parts is on the agenda. This "Damocles Sword" hangs over Europe for a long time since last year. The automotive industry is under attack not only in Germany but also in France and Italy. According to preliminary estimates, the total cost of the indicated duties is $300 billion.

According to experts, the "domino effect" will follow in the case of the introduction of US duties. The business climate in the eurozone countries will significantly deteriorate, thereby slowing the growth of key indicators and the economy as a whole.

In the summer of 2018, Jean-Claude Juncker, following his visit to Washington, prevented the onset of a trade war as the parties agreed to create a working group to resolve the problem. At the beginning of this year, Trump again announced that he is ready to introduce 20 percent duties on cars and auto parts imported from EU countries if the Alliance does not reduce or eliminate trade barriers against companies from the United States. But after much deliberation, the American president postponed the matter until the end of the year. Not the last role (albeit indirect) in this was played by China, another escalation of the trade war turned the attention of the White House to Beijing.

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Will Donald Trump decide to open a "second front" of the trade war? Opinions of experts on this subject vary. According to some analysts, the US president will not resort to real action (although it may increase verbal pressure) until the US-Chinese conflict ends. After all, in this case, Brussels will impose retaliatory duties on American goods for a total amount of 20 to 40 billion euros. Other experts nevertheless admit this scenario, considering the situation from a political point of view.

On the eve of the election campaign, Trump needs a victory in a trade war, but China suddenly turned out to be a "tough nut" and the conflict got stuck in long and futile negotiations. All this is reflected in the ranking of the American president, who promised his voters a military offense. In the light of these events, Trump may decide on yet another adventure by announcing the introduction of duties on European cars. Nevertheless, he will agree to negotiations with Brussels, hoping for a quick conclusion of the transaction. Given yesterday's rhetoric by Malmstrom, a similar scenario is very likely. On the other hand, this Trump scheme is already well known to market participants. Therefore, if the American president nevertheless agrees to trade negotiations with Europe, this topic will leave the agenda for some time and EUR/USD traders will switch to other fundamental factors.

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