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The dollar has taken a step back! Perhaps the escalation of the trade conflict between the United States and China will be avoided


Once again, US stock indices are pulling the euro out of the abyss. The EUR / USD Bears were unable to storm the support at 1.077-1.0775 and continue the southern campaign due to the growth inspired by the good news of the S&P 500. FOMC officials believe that depression will be avoided, rumors about the expansion of fiscal stimulus and optimistic rhetoric of Washington's trade negotiations and Beijing regained investor interest in stock purchases. However, the release of data on the US labor market for April can spoil their mood. 




One of the factors that strengthened the US dollar in early May was talk of an escalation of the trade conflict between the States and the Middle Kingdom, which spurred demand for safe haven assets. Donald Trump threatened China with new tariffs, first in response to the alleged laboratory origin of COVID-19, and then due to Beijing's failure to fulfill the terms of the January agreement to increase purchases of US products by $ 200 billion, including $ 77 billion in 2020. For the first 4 months of export The USA to China fell by 5.9%, which raises doubts about the parties' fulfillment of their obligations. In fact, Liu He, Robert Lighthizer and Steve Mnuchin are sure that everything will be fine. Information about the optimism of the main negotiators extended a helping hand to the “bulls” on EUR / USD. 

Yes, Donald Trump needs a scapegoat ahead of the presidential election, but the more he puts pressure on Beijing, the more criticism will follow regarding his protectionist policies. Which, I must admit, was unsuccessful. It was not possible to bring China to its knees: its export to the United States in 2019 fell by $ 60 billion due to trade duties, but deliveries to other countries of the world, on the contrary, grew by approximately $ 70 billion. 


Dynamics of Chinese exports


Source: Wall Street Journal.

Along with Trump gradually cooling off from anger, support for American stock indices was provided by information on the preparation by the Democrats in the House of Representatives of a new project for an additional $ 750 billion fiscal stimulus and statements by FOMC officials that a repetition of the history of the Great Depression of the 1930s could be avoided. According to the president of the Federal Reserve Bank of Minneapolis Neil Cascari, the Fed will continue to be aggressive in order to avoid a pessimistic scenario, and the head of the Federal Reserve Bank of Atlanta, Rafael Bostik, believes that it is better to go too far than doing too little to help the US economy get out of recession. 

The optimism of FOMC officials is understandable, however, the release of data on the American labor market is likely to show that the current situation in the United States is even worse than almost a century ago. According to forecasts by Bloomberg experts, unemployment in April will jump to a record high of 16%, and employment will decrease by 22 million, which is 27 times more than the worst drop in the indicator during the recession of 2007-2009, and 11 times more than the previous anti-record in September 1945, when the country came to its senses after the end of World War II. Will the S&P 500 withstand such a blow? If so, then EUR / USD will have the opportunity to rise above 1.09. Otherwise, the Bears will be preparing for a new assault on support at 1.077-1.0775.


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