Euro-Dollar Nerves Ahead of Key Juncker-Trump Trade Meeting in Washington

European Commission President Jean-Claude Juncker. Image © European Union, 2018 / Source: EC - Audiovisual Service / Photo: Etienne Ansotte

- "EUR/USD will take some guidance from the outcome of today’s scheduled meeting" - CBA

- "Trump may step up his threats to impose car tariffs – but that he will not actually implement them" - Berenberg

The Euro-to-Dollar exchange rate is quoted at 1.1696 at the time of writing, having been as low as 1.1673 and as high as 1.1725 this week. The pair is relatively flat with traders eyeing a key trade meeting between European Commission President Jean-Claude Juncker and US President Donald Trump.

The meeting comes as the US President tries to reshape global trade dynamics in a manner that will better suit the United States which runs a massive trade deficit with the rest of the world. Trump's agenda is to achieve a no-tariff regime with the likes of Europe: the IFO Institute’s estimate of the current measure of total unweighted tariffs in the U.S. is 3.5%, while the equivalent measure in the EU is 5.2%.

Trump - perhaps understandably - sees this as an unfair state of affairs and in an attempt to strong-arm Europe into reducing tariffs he has threatened to impose further tariffs on EU imports.

"EUR/USD will take some guidance from the outcome of today’s scheduled meeting between U.S. President Trump and European Commission President Jean Claude Juncker, to discuss trade in Washington," says Richard Grace, a foreign exchange strategist with CBA.

Juncker will attempt to convince Trump not to move forward with threats to impose tariffs, however CBA's Grace says Juncker may be on the back foot owing to the lopsided tariff regimes being promoted in the US and EU.  

"President Trump’s latest suggestion is “both the U.S. and the EU drop all tariffs.” While this would appear sensible, we can’t see EU farmers agreeing to this. An unfavourable outcome of no reduction in proposed or actual tariffs will likely put some intra‑day downward pressure on EUR/USD," says Grace.

Trump has threatened the European Union with the imposition of tariffs on car imports which would potentially hurt the likes of Germany whose exporting prowess drives the Eurozone's large current account surplus that provides a strong and fundamental underpinning to the value of the Euro.

Juncker will however likely point out that Trump himself had abandoned the TTIP talks with the EU upon taking office; in doing so he will be pointing out an obvious contradiction in Trump's agenda - the EU had been seeking a lower tariff regime until Trump torpedoed the efforts. 

These talks had yielded a near-agreement that came as close as possible to abolishing tariffs and many non-tariff barriers to trade between the US and the EU, the two biggest economies in the world.

Holger Schmieding, an analyst with Berenberg Bank in London says he expects Juncker and European Trade Commissioner Cecilia Malmström to convey three messages to Trump today:

1) The EU is ready to strike a deal with the US. The deal could be modest (cars and a few other sectors only) or ambitious in scope (many sectors, and/or perhaps more countries beyond the US and the EU). But in a deal both sides must make concessions. If the US wants the EU to abolish its current tariffs on cars, the US would also have to do away with some of its own trade barriers.

2) The EU is ready to work with the US to strengthen the rules governing global trade, preferably within the framework of the World Trade Organization (WTO), so that the rules can better deal with discriminatory Chinese practices.

3) If Trump imposes new US car tariffs, the EU would retaliate in kind. That Trump now sees a need for a $12bn support package for US farmers hit i.a. by Chinese retaliation against new US import tariffs exemplifies how a trade war would hurt all sides including the US.

"Expectations what today’s meeting may yield are low. We may get some friendly words first followed by potentially less friendly tweets. The best result we can probably hope for is that the US and the EU engage in serious and more detailed negotiations afterwards," says Schmieding.

Berenberg's base case remains that Trump may step up his threats to impose car tariffs – but that he will not actually implement them.

"Instead, he will either strike a deal ahead of the US mid-term elections on 6 November or at least engage in lengthy negotiations during which the threat remains on hold. If so, Eurozone business confidence and growth could probably rebound to rates around 2% from Q4 2018 onwards. The risk to that call is obvious: if Trump starts a trade war with the big EU by resorting to punitive tariffs on car imports, the economic and financial outlook would be more clouded," says Schmieding.

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