EUR/USD wary on US-China trade issues – Danske Bank

Allan von Mehren, Chief Analyst at Danske Bank, gives his views on the potential impact on the pair of a trade war between China and the US.

Key Quotes

“While there has been some trade-war fatigue in the FX market in recent weeks as the US-China tit-for-tat measures have been largely as expected, we are now entering a crucial phase in the trade conflict with heightened uncertainty as to what will happen next”.

“Our base case of negotiations and a 'grand bargain' could notably weigh on EUR/USD. However, in our risk scenario of an outright trade war, where the US isolates itself, we stress that this will: (i) in the short term return focus to US protectionist measures being associated with a political push for a weaker USD from the Trump administration and send the USD lower still and (ii) in the medium term weigh on the USD via productivity differentials with our ‘trade-war-adjusted’ medium-term valuation (MEVA) estimate for EUR/USD being around 1.34”.