The euro has been notably resilient in light of US-China trade tensions during the past week or so
EUR/USD in particular has been incredibly resistant to any negative headlines during the past week as it climbed from around 1.1160 following a gap down last Monday to highs just above 1.1260 overnight before trading around 1.1230-40 currently.
Aside from near-term bias continuing to favour buyers and continued short squeeze in the pair, I can’t find much other reasoning for the strength in the euro here. Perhaps as EM currencies are being squeezed from US-China trade tensions, there is some degree of unwinding in carry trades against the euro which is helping the single currency but how much is that a factor I can’t ascertain for sure.
Either way, it’s best to always stick with the charts and the near-term levels continue to suggest that EUR/USD buyers are still in near-term control.
But looking ahead, how much longer can the resilience in the euro last?
The reason why that question persists is that there are plenty of headwinds still to come for the euro over the next few days/weeks. The first being US auto tariffs which are due to hit an already weakening industry and dampen German economic conditions further.
The second being the upcoming European Parliament elections where the populist wave is expected to make headway and unsettle the establishment a little when considering what could transpire over the next decade or so. The elections aren’t going to destabilise the current order but it certainly will pose doubts about how long things can stay this way in the euro area without drastic changes in the next few years.
Lastly, there’s the more obvious correlation that the euro area’s growth outlook is highly dependent on China as well. If trade talks continue to unravel and tensions escalate further, I don’t see how things can get better for the region as business/investor sentiment will start to turn sour again. Remember how things fell off last year? We could be at the precipice of something similar again if things get worse between US and China.
With those three factors in mind, I’d be wary of further gains in the euro from hereon. I reckon we’re nearing a top for the euro’s recent run rather than a build-up to an extensive rally. If EUR/USD starts to fall towards a test of the key hourly moving averages, expect the downside pressure in the pair to intensify rather quickly given the above reasoning.