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The EUR/USD currency pair is expected to decline if the trade conflict between the United States and Europe were to intensify, according to the latest research report from Commerzbank.
The focus is turning to US data today and tomorrow as concern over a weakening US economy are mounting following a weak manufacturing ISM index and yesterday's downward revision in last month's ADP employment figures.
In addition, news of growing trade tensions between the US and Europe is weighing on investor sentiment. Interestingly, this too put pressure on the US dollar yesterday, while in theory, it should support the US currency as the imposition of tariffs on EU imports should be inflationary and thus raise the US rate outlook, the report added.
Instead, the threat of a trade war with Europe is seen as deteriorating the US growth outlook and market rate expectations, as a result, have started to fall again.
While indeed another US trade war would weigh on the US economy and may even force the Fed to cut interest rates more aggressively, it would be an even bigger burden on Europe which is already seen at the brink of a recession, Commerzbank further noted in the report.
