Euro-to-Dollar Week Ahead: Resilient but Brexit Will Sink What EU Politics and U.S.-China Flak Doesn't

- EUR/USD resisting downside but under pressure in 2020 range.

- As U.S.-China tensions flare and EZ constitutional lawfare rages.

- Brexit could sink EUR where trade tensions and EU politics don't.

- GBP's severe depreciation a de facto tariff on an ailing Eurozone.

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- EUR/USD spot at time of writing: 1.0819
- Bank transfer rates (indicative): 1.0435-1.0510
- FX specialist rates (indicative): 1.0615-1.0706 >> More information

The Euro-to-Dollar rate is defying gravity after several times recovering back above the 1.08 support level before a daily close last week, but the single currency is besieged by risk on all fronts that could push it back toward 2020 lows in the coming days ahead of even further losses in the weeks ahead.

Europe's single currency recovered the 1.08 handle three times in a resilient performance that saw it cede only 0.15% to the Dollar last week as other major currencies went into all out retreat, but the Euro might lack the momentum necessary to overcome nearby resistance on the charts and is increasingly at risk from multiple fundamental headwinds that could conspire to drive the Euro-to-Dollar rate to a new millenium low in the coming weeks and months. 

All majors ceded ground to the Dollar last week except for the Euro, a resilient showing from a currency that's increasingly besieged by political, geopolitical and economic risks that became more pressing on all fronts. Friday's resilient performance came after the German economy entered recession early and with the U.S. and China exchanging trade-related fire over familiar as well as more novel complaints, while Brexit negotiators continued to lament a lack of progress in UK-EU trade talks.

Each contributed to risk-aversion in financial markets Friday, as a feud between the German Constitutional Court and European insitutions simmered away, and might risk taking the Euro-to-Dollar rate below the 1.08 handle if investors remain risk-averse this week. The mood between the U.S. and China will be key to the atmosphere in markets, although so too are incoming government disclosures on the number of new coronavirus infections in economies that are reopening following 'lockdown' periods.

"It is essentially still side lined but under pressure in its range. Below we have minor support at 1.0766 and the 1.0727 24th April low. This guards the 1.0636 March low and the 1.0340 2017 low. Rallies will find initial resistance at 1.0897, this weeks high, ahead of the 200 day ma at 1.1019," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Above: Euro-to-Dollar rate shown at daily intervals alongside USD/CNH rate (red line). 

"The trade deal was stone dead already from the outset, but no one had an incentive to reveal it until after the US election. The Corona virus has offered the Trump administration an opportunistic chance to opt for China bashing instead. Buy USD/CNH," says Andreas Steno Larsen, a strategist at Nordea Markets. 

Risk currencies, stock markets and bond yields came under pressure as investors contemplated what might happen to the fledgling recovery if an already-bombed-out global economy is subjected to a second edition of the U.S.-China trade war, which grew more likely when the U.S. took steps to keep technology out of Huawei hands and Chinese government controlled media said the country would retaliate using its 'unreliable entity list'.

This was after President Trump told Fox "we could cut off the whole relationship" with China, as the two sides seek to implement the January 'phase one deal' that ended the trade war between them while also trading accusations relating to the coronavirus pandemic.There is a litany of legislative bills and lawsuits in progress in the U.S. over allegations that China mishandled the initial outbreak of coronavirus, which is threatening to lift the USD/CNH rate that the Euro often has a strong negative correlation with.

"Last week the German parliament made the burning of flags from the EU a punishable offense, which could be seen as a preparation for the reactions that are likely to come, if the ECB manages to continuously neglect the German constitution in its purchase program. Prepping for the EU-led onslaught of the German constitution is underway, but we are not so sure that the German Constitutional Court (GCC) will give up without a fight," Larsen says.  

The economic connection between China and Europe runs deep so weakness in Yuan can lead to weakness in the Euro, which will navigating any second edition of the U.S.-China trade war as Germany's highest court engages in open lawfare with the European Union over the European Central Bank (ECB) quantitative easing programme and as an important July 01 Brexit-related deadline approaches with the trade talks between the UK and EU having produced nothing more than fresh bout of deadlock.

Brexit 'cliff edge' risks and other factors are expected to weigh heavily on Sterling in the weeks ahead, potentially taking it beneath 1.05 against the Dollar and without an accompanying devaluation from 1.08 in the Euro this price action would put GBP/EUR below parity and at a record low of 0.9722. 

Above: Euro-to-Dollar rate shown at weekly intervals alongside USD/CNH rate (red line). 

Sterling's fall would amount to something like an 18% de facto 2020 tariff on imports from the Eurozone into the UK, one of the bloc's top export markets, and at a time when demand from many of the bloc's other markets like China is under pressure. That would add to the 10.9% de facto tariff that went on between June 2016 and January 2020.

Sterling's sickly condition is another downside risk for a Euro that some forecasters see hitting 1.02 by the end of June, which would leave it at a new millenium low and limit the fall in GBP/EUR to 1.02. As a result, Brexit might sink what U.S.-China trade tensions and constitutional lawfare between Germany and the European institutions don't.

"While most believed US rhetoric/action against China could escalate closer to the November election (no earlier than 3Q), a few felt escalation was more imminent (over the coming month). The rationale was "saving the stock market" in the US was difficult and in any case would not help politically at a time of record job losses, so the need to deflect blame could be acute and sooner than expected," says Adarsh Sinha, a Hong-Kong based strategist at BofA Global Research. "Last week's reports that retaliatory measures are being considered by the US administration suggest this escalation could happen sooner rather than later. But much depends upon the sustainability of the Phase One trade agreement from January." 

BofA Global Research forecasts Euro-to-Dollar rate of 1.02 by the end of June, with that rate likely to also prevail at the end of the third quarter as the single currency navigates a minefield of political and geopolitical risks that could compromise or otherwise constrain the bloc's recovery from the economic devastation wrought by the coronavirus. The bank also says the global recovery out of the coronavirus trough will be slow and prone to setbacks that risk prolonging the U.S. Dollar rally that had previously been expected by many to ebb well in advance of the U.S. election.

A U.S. Dollar Index rally is made more likely by the steep prospective downside in Europe. President Donald Trump said last week that it's "a great time to have a strong dollar," and soon Sterling and the Euro just might make him eat those words because a Euro-to-Dollar rate of 1.02 and a Pound-to-Dollar rate of 1.05 will lead the ICE Dollar Index to hit the roof without, substantial, substantial downside in USD/JPY and USD/CHF. 

Sterling and Euro transactions account for nearly 60% of flows measured by the index while Yen and Franc flows are worth around 17%. Downside in USD/SEK and USD/CAD, both worth only a small fraction of flows, might constrain the index upside but would also be incongruous in risk-off conditions. 

Above: Euro-to-Dollar rate shown at daily intervals alongside ICE Dollar Index (red line).