EUR/USD is flat at the start of the new trading week. Currently, the pair is trading at 1.1229, down 0.04% on the day. There are no data releases out of the eurozone or the U.S., so we can expect the pair to continue to drift on Monday. On Tuesday, Germany and the eurozone release ZEW Economic Sentiment and we’ll also get a look at German CPI.
The trade war between the U.S. and China escalated last week, as the U.S. slapped China with new tariffs on Friday. The move raised tariffs on some $200 billion in Chinese goods from 10% to 25%. The move was announced a week ago, and global equity markets have responded with sharp swings. However, the reaction of the currency markets has been muted, and EUR/USD ended the week with slight gains. China is yet to retaliate with counter tariffs on U.S. goods, but has allowed the Chinese yuan to fall to its lowest level in four months. A lower yuan makes Chinese exports more competitive and will help cushion the effect of the new U.S. tariffs.
Despite the dramatic rise in tariffs and the Chinese promise to retaliate, talks between the sides continue, with officials scheduled to meet in Beijing. The new tariffs do not apply to Chinese goods that left port prior to May 10, affording a 2-week window for negotiators before the tariffs take effect. The escalation in tensions has shelved a meeting between President Trump and Chinese President Xi, but the two leaders could meet at the G-20 summit in Japan in June.
U.S. consumer inflation levels were soft in April. CPI dipped to 0.3%, down from 0.4% a month earlier. This missed the forecast of 0.4%. The core release remained at a weak 0.1% for a third straight month, shy of the forecast of 0.2%. The Federal Reserve has said that it is open to rate moves in either direction, and inflation levels will be a critical factor in any rate move. The Fed follows a different indicator for monetary policy, the core personal consumption expenditures (PCE) price index. This index increased 1.6% in March year-to-year, its smallest rise in 14 months. However, the new tariffs will increase the price on Chinese goods and boost inflation, which could lead the Fed to raise rates in the near future.
