24.07.202014:03 Forex Analysis & Reviews: A trade war won't help the dollar

The EU euphoria has pushed the EUR/USD quotes to the highest level since the beginning of 2019, allowing the implementation of the purchase strategy I announced. However, much more important is the fact that a new topic has appeared on the market. Two, actually. The issue of European bonds on behalf of the EU increases the likelihood of the euro coming to the US dollar in a variety of areas, from gold and foreign exchange reserves to conversion operations. In addition, the entire old world securities market will benefit from the unity of Europe.

The 27 EU countries have approved a Franco-German proposal for a € 750 billion fiscal stimulus after four tense days of negotiations. Taking into account the € 1.1 trillion budget, the total amount of aid was € 1.8 trillion. After a long period of resistance, the "modest four" agreed to join the majority, the yield on peripheral Eurozone bonds and their spreads with their German counterparts declined, and the euro rose.

Dynamics of yield spreads

European bonds that have the opportunity to participate in the ECB's asset purchase program are a very attractive instrument for investors, which in the near future can seriously compete with US Treasury bonds. The fact that the EU supports Italy and other troubled Eurozone countries with all its might increases the attractiveness of the bonds they issue. They are a serious alternative to the debt obligations of developing countries. At the same time, investors will pay increased attention to the EuroStoxx, DAX and other Old World indices, and the associated capital inflows to Europe will be a catalyst for the EUR/USD rally.

Perhaps the main problem for the "bulls" on the main currency pair is the escalation of the conflict between the US and China. In 2018-2019, the Euro was seriously damaged due to trade wars, and speculators continue to increase net shorts for the dollar. In four of the five previous cases, this led to an increase in the USD index.

Dynamics of speculative positions and the US dollar

If you add to this the increased risks of strengthening anti-Chinese sentiment in the run-up to the November US election, the chances of a deep correction in EUR/USD do not look so remote.

In my opinion, whatever Donald Trump does, nothing good will come of it. The resumption of a trade war with the Middle Kingdom is fraught with a fall in US stock indices, which the President considers an indicator of the effectiveness of his activities. Moreover, unlike in 2019, when Beijing swallowed resentments, now it will not remain silent. China has a great opportunity to diversify its gold and foreign exchange reserves in favor of the euro, which does not allow us to say with certainty that the EUR/USD will fall if the trade conflict resumes.

The main events of the last week of July will be the release of data on German and American GDP for the second quarter, as well as the FOMC meeting. If the German economy does not sink as deep as Bloomberg experts expect, the main currency pair will get a new boost for growth. Pullbacks to support at 1.1545 and 1.15 should be used for purchases with targets at 1.175 and 1.185.

EUR/USD, the daily chart