- The euro continues to decline as investors assess the nuances of the EU-US trade agreement.
- Eurozone goods will incur a 15% tariff in exchange for significant EU investments and large purchases of energy and military supplies from the US.
- The US dollar retains a moderately positive outlook, bolstered by favorable US economic data.
In the market, sentiment seemed to favor buying on rumors and selling on facts regarding the recent EU-US trade deal. Even though the European Union has finalized this agreement, it didn’t provide robust support for the euro. Meanwhile, the US dollar appears set for a recovery, primarily due to investor backing of the Fed’s hawkish position.
On Monday, the euro dropped over 100 pips and is poised for one of its weakest daily performances in several months. Initially, it struggled around the 1.1770 mark and was trading near 1.1660 just ahead of the US market opening, with technical indicators dipping significantly into bearish territory.
European Commission President Ursula von der Leyen formalized the agreement with US President Donald Trump, which lowers tariffs on European goods to 15%. In return, the eurozone commits to investing 600 billion euros in the US and increasing its gas and military equipment purchases.
Nevertheless, this deal hasn’t shifted the dynamics between the euro and the dollar, with the latter gaining traction from relatively strong US economic data.
The economic calendar for today is rather sparse, only highlighting the Dallas Federal Reserve’s Manufacturing Index for some insight during the US session. Investors might be taking a wait-and-see approach as they anticipate significant events later in the week, particularly Wednesday’s Federal Reserve decision and the Non-Farm Payroll (NFP) report for July.
Daily Digest: Market Reaction to EU-US Trade Agreement
- According to EC President von der Leyen, this deal is “the best we could get,” but perhaps it doesn’t fully align with the market’s expectations. While the 15% tariff is preferable to the initial 30%, it still diverges from the zero-tariff approach Brussels initially sought. The tariff affects significant eurozone exports like pharmaceuticals and automobiles. In return, Europe is expected to invest heavily in the US and purchase a considerable amount of gas. The euro’s response was negative as the market scrutinized the agreement’s details.
- The dollar’s moderate strength has persisted since last week, buoyed by data released on Friday showing unexpected gains in durable goods orders. Although the numbers were the weakest of the year at 9.3%, they exceeded the anticipated drop of 10.8%. Core durable goods orders, excluding transportation, managed a slight increase of 0.2%, surpassing expectations of 0.1%.
- These positive figures come on the heels of a surprise drop in weekly US unemployment claims, with applications declining for the sixth straight week and reaching their lowest levels in three months. This trend highlights the labor market’s resilience and potentially gives the Federal Reserve more leeway to maintain higher interest rates for an extended period.
- The Fed’s Monetary Policy Committee meets on Tuesday and Wednesday, likely to keep benchmark interest rates unchanged in the 4.25% to 4.50% range. The press release from Chair Jerome Powell will be closely watched to see if these new trade agreements and anticipated US GDP rebounds influence the bank’s conservative stance regarding rate cuts.
EUR/USD Breaks Major Support Level
At the start of the European session, the EUR/USD faced strong bearish pressure, breaking down through the critical 1.1700-1.1710 support range. This confirms a classic trend reversal pattern. Technical indicators are now deeply negative, with the 4-hour relative strength index (RSI) falling below 50 and the MACD indicating significant bearish momentum.
The pair continues to struggle, falling below the July 22 low of 1.1680 as it moves toward its measured target. If it reaches that level, the euro will need to rebound sharply. The next support target could be around 1.1555, which represents a mid-July low.
If the pair manages to ease the bearish pressure above 1.1710, it may shift attention to an intraday high near 1.1770, with a likely challenge ahead at 1.1790 from July 24, as bulls attempt to push beyond the multi-year high of 1.1830.
