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Dollar confused all the cards! The escalation of the trade war is not the best news for the bulls on EUR / USD!


The latest thing that financial markets fighting a pandemic need now is a new round of the US-China trade war. Donald Trump's statement about convincing evidence of the laboratory origin of COVID-19 and its readiness to introduce new tariffs against the Celestial Empire in retaliation for the lives of tens of thousands of Americans dropped global stock indices. Within a few hours, the S&P 500 erased all achievements in a week, which allowed the greenback to quickly recover. 



Will the US stock market continue to grow in May as rapidly as it did in April? I doubt very much. First, April was the best month for US stock indices since 1987, and it will be incredibly difficult to repeat its success. Secondly, the opening of the economy is, of course, good news, but what about the depressing macro-statistics and corporate reporting, to which the escalation of the trade war between Washington and Beijing can easily be added? 


The forecasts for business activity in the US non-manufacturing sector from ISM, European retail sales and Chinese foreign trade look bleak, not to mention the estimates of statistics on the American labor market. According to experts of the Wall Street Journal, unemployment in April will jump to 16.1%, which is significantly higher than the previous record of 10.8%, which took place in 1982. Employment will be reduced by 22 million. The previous worst result in history is 1.96 million in September 1945 - did not stand nearby. After 113 consecutive months of job creation, the United States faced a real disaster. Will stock indices resist it?


US unemployment and employment dynamics

Source: Bloomberg.

A weak labor market reduces the chances of a V-shaped recovery in US GDP in 2020 to a minimum. Even Donald Trump's statement about the need to reduce taxes withheld from wages did not save the S&P 500 from sales. Americans will start to benefit from this fiscal stimulus only when they return to work, and the process of quitting quarantine risks taking a long time. 


US unemployment and GDP dynamics


Source: Bloomberg.

A new round of trade wars may completely confuse buyers of American stocks with all the cards. In 2018, Donald Trump chose a good time to attack China: the US tax-boosted economy felt confident to absorb import tariffs, but what will happen now? It is possible that instead of a V- or U-shaped restoration, the States will have to face the letter W. 

Falling stock indices and the associated deterioration in global risk appetite will play into the hands of the US dollar. As for the euro, in the week of May 8 it will have to pass the tests not only of retail sales, but also of the EU forecasts for GDP, inflation and unemployment, as well as the verdict of the German Constitutional Court on the legitimacy of the ECB quantitative easing program. In addition, rumors about the expansion of QE have not disappeared - the chief economist of the European Central Bank, Philip Lane, said that the regulator is ready to increase the scale of the asset purchase program and change its composition. The fall of EUR / USD below the support at 1.0935 and 1.092 will increase the risks of continued peak.


LiteForex analytics



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