Euro-Dollar Rate: Reports of Auto Tariffs Delay Helps Put in a Floor to the Decline

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- Reports suggest EU car import tariffs to be delayed by U.S.

- Euro rally short-lived as markets await official confirmation

- Technical studies suggest hard floor in EUR/USD @ 1.11

The Euro went higher in mid-week trade on reports the U.S. will delay its "Section 232" tariffs on autos and parts for up to six months, and if officially confirmed the news could put a floor beneath the under-pressure Euro we are told. 

The deadline for the U.S. to decide on the next steps on possible auto tariffs on EU cars was May 18, the timing therefore will come as a relief to global markets which have been battered of late by the U.S.-China trade war escalation.

The uncertainty has been attributed by a number of analysts as being behind ongoing underperformance by the Euro as tariffs would hamper the already struggling Eurozone economy and further delay the onset of interest rate rises at the European Central Bank.

As can be seen in the above graph there was a notable knee-jerk higher on the news before a slight pull-back

The subsequent paring of gains reflects market caution on the reports.

"Risks remain that this report is premature. We remain cautious until a formal announcement is made and will monitor the situation closely," says Ned Rumpeltin, European Head of FX Strategy with TD Securities in London.

If the reports are indeed confirmed, Rumeltin says the delay should help draw a line under potential EUR/USD weakness.

"The situation remains highly fluid, but we have long considered a potential pivot in trade conflicts to Europe as one of the greatest near-term downside threats to EUR," says Rumpeltin.

The German economy would likely be the hardest hit of the Eurozone economies, mostly via the direct tariff impact and the spillovers through the domestic supply chain.

Exports of vehicles and auto parts to the US represent 2% of the country's total goods exports, in value terms.

Rumpeltin says an official announcement that auto tariffs are being delayed should help return the focus in EUR.USD back to more traditional fundamentals.

The Euro-to-Dollar exchange rate is quoted at 1.1202 at the time of writing, having been as low as 1.1178 earlier in the week.

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Technical Studies Put the Floor at 1.11

The Euro has been cascading lower against the Dollar in a clearly defined descending channel since the start of 2019 and analysts at LMAX Exchange, a global financial technology company, see a chance the exchange rate could find a very strong technical floor at circa 1.1100.

The 1.1100 barrier is likely to result in an eventual reversal of the downtrend trend and has the potential for triggering subsequent substantial upside gains.

“The market has been trading in a well-defined downtrend over the past several months to a 2019 low, down towards the 1.1100 area. There is a lot of support into this zone here, and we actually believe the market could see a bullish reversal that triggers a pick-up in volatility,” says analyst Joel Kruger at LMAX Exchange.

The 1.1100 level corresponds with a previous higher low which formed during June, mid-way through the pair’s rally in 2017. Higher lows are often strong support and resistance levels since they spotlight areas of increased buying and selling, producing unusual supply and demand dynamics.

After the pair bases at 1.1100 LMAX Exchange are looking for a peak and trough higher to provide evidence of the birth of a new uptrend. Then beyond that, they are looking for further confirmation from the pair breaking above certain key resistance levels.

“Now for this to get going we need to see an initial break above some shorter-term resistance up at 1.1450, which guards against the more significant resistance in the form of the 2019 high at 1.1570,” says Kruger.

In the meantime losses should be limited by the 1.1100 support zone and only a break below 1.1000 would negate the bullish hypothesis.

If the level holds and a new uptrend develops, LMAX Exchange is bullish in their forecast, seeing the pair developing an uptrend which could reach as high as the original February 3-year highs at 1.2550.

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