The Euro has weakened as optimism over the US-EU trade deal has quickly faded.
At the start of the week, the US and EU reached a deal that imposes a baseline 15% tariff on most European goods (including autos) entering the US market. Following the announcement of this deal, European assets initially opened higher on Monday as investors breathed a sigh of relief that a deal had been done and that the worst-case scenarios had been avoided (i.e. 30-50% tariffs). However, these gains proved short-lived as the reaction from European leaders and investors has been largely negative as the details were further digested on the deal.
While the 15% tariff is better than the previously threatened 30–50%, it's higher than the 10% target EU negotiators were pushing for and there are concerns the deal is skewed in favour of the US versus Europe which may have negative economic implications for Europe moving forward. Clearly, it seems they felt that accepting the higher baseline level was a better option than the pain of potentially drawn-out negotiations and uncertainty whilst also coping with super high tariff levels. They will hope to eventually bring these tariff levels down over time, but it will likely lead to a reduction in the European GDP in the short to medium term.
In other news, the USD has strengthened against most currencies so far this week, as markets bet that the signing of trade deals will ease the burden on the US economy. Combined with month-end flows, the recent resilience in US economic data and the fact the USD had been heavily sold this year, then it’s no surprise the Dollar has become more attractive to investors. We will shortly see the release of the latest US GDP figures (1.30pm) and then the latest Federal Reserve interest rate meeting tonight. The Fed will likely once again defy pressure from President Trump and keep interest rates on hold for the fifth consecutive meeting. However, Chair Powell will likely keep the door open to a September cut but without fully committing to one either. The most interesting aspect of the meeting will likely be whether there are any dissenters in the committee voting for an immediate cut.
As a result, the GBP/EUR has rebounded around 1.5-cents from Monday morning and now trades at a 2.5-week high. The EUR/USD has slipped 2.5 cents lower and sits around a 5-week low. The GBP/USD dropped nearly 1% this week and traded down to the lowest levels in 10-weeks.
