EUR/USD Opening Range in Focus as US Mulls Higher Tariffs for Europe


EUR/USD Rate Talking Points

EUR/USD extends the rebound from last month’s low (1.0981) as the US ISM Manufacturing survey unexpectedly narrows in November, but the market reaction may prove to be short lived as the Trump administration looks poised to raise tariffs on European goods.

EUR/USD Opening Range in Focus as US Mulls Higher Tariffs for Europe

EUR/USD breaks out of the range bound price action from the previous week as the ISM Manufacturing survey slips to 48.1 from 48.3 in October to mark the second-lowest reading for 2019.

A deeper dive into the ISM survey shows the Employment component also narrowing to 46.6. from 47.7 during the same period, and the data certainly does not fare well for the upcoming Non-Farm Payrolls (NFP) report, which is anticipated to reveal the US economy adding 190K jobs in November.

Developments coming out of the US may continue to influence EUR/USD as the Office of the United States Trade Representative (USTR) announces that the Trump administration is “initiating a process to assess increasing the tariff rates and subjecting additional EU products to the tariffs.”

Image of USTR statement

The US identified “France, Germany, Spain, and the United Kingdom” in the statement as the “the four countries responsible for the illegal subsidies,” with more updates to be provided later this week. A separate notice from the USTR added that “the list of French products subject to potential duties includes 63 tariff subheadings with an approximate trade value of $2.4 billion.

The ongoing shift in US trade policy may play an increased role in driving EUR/USD volatility as it puts pressure on the European Central Bank (ECB) to further insulate the monetary union.

However, recent remarks from the Governing Council suggest the central bank will stick to the sidelines at its last interest rate decision for 2019 as the account of the October meeting emphasized that “it was important to fully implement the September monetary policy decisions.”

Image of ECB interest rates

It remains to be seen if the ECB will continue to push monetary policy into uncharted territory as the central bank reestablishes its asset-purchase program, but the Governing Council may continue to endorse a dovish forward guidance on December 12 as President Christine Lagarde tells European lawmakers that “monetary policy will continue to support the economy and respond to future risks in line with our price stability mandate.”

As a result, fears of a US-EU trade war along with the diverging paths between the ECB and the Federal Reserve may have a greater influence on EUR/USD going into 2020, with the monthly opening range in focus amid the slew of US data prints on tap for the first full week of December.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, the broader outlook for EUR/USD remains tilted to the downside as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly-low (1.0879) in October.
  • The recent correction in EUR/USD appears to have run its course as the advance from the yearly-low (1.0879) fails to produce a test of the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement).
  • The monthly opening range has been a key dynamic for EUR/USD so far in the fourth quarter as the exchange rate carved a major low on October 1, while the monthly high for November occurred during the first full week of the month.
  • In turn, the monthly opening range remains in focus, with a break/close above the 1.1100 (78.6% expansion) handle bringing the October-high (1.1180) on the radar as it lines up with the 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) region.
  • Recent developments in the Relative Strength Index (RSI) offers conviction for a larger rebound in EUR/USD as the oscillator snaps the bearish formation from October.
  • However, lack of momentum to break/close above the 1.1100 (78.6% expansion) handle may generate range bound prices amid the recent reaction to the Fibonacci overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement).

For more in-depth analysis, check out the 4Q 2019 Forecast for Euro

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.



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