Euro lower despite EU-US trade deal

There’s been a muted enough market reaction so far to the weekend news that the EU and US have agreed a trade deal, including a 15% tariff, which is not too surprising given there had been talk over the latter part of last week that an agreement was in the offing. While there’s some uncertainty as to what is included in the agreement – which seems to be par for the course with these trade ‘deals’ –  it does at least mean that the risk of a damaging tit-for-tat tariff war has been averted. In terms of FX, the euro jumped to around $1.1780 against the dollar overnight but has since come all the way back to about $1.17, below Friday’s closing level of just under $1.1750. The single currency also bounced briefly against sterling to around £0.8770, a new year to date high, but has since retreated to £0.8720, while the pound is drifting lower against the dollar this morning, currently trading at about $1.3420. Looking to the week ahead, the Fed holds a two-day monetary policy meeting on Tuesday-Wednesday and despite much haranguing from Donald Trump to lower interest rates is likely to stay to on hold, while there’s some important economic data due over the course of the week including GDP (for Q2) and inflation in both the Euro area and US as well as the jobs (payrolls) report in the US on Friday.

Euro area bond yields are a touch lower at the open this this morning having risen last week – particularly at the short-end of the curve – as expectations for any further rate cuts were pared back following the ECB’s latest monetary policy meeting. UK yields ended lower on the week in response to some softer than expected economic data (which keeps the Bank of England on track to lower rates next month), while US yields were mixed with short-dated yields nudging up on the week but 10-year yields ending slightly lower. In equity markets, European stocks have opened in positive territory this morning in response to news of the EU-US trade deal, up around 1%, while the S&P 500 in the US closed out Friday at a fresh record high after gaining 1.5% on the week.

In a statement published following the announcement that a trade deal had been reached, European Commission President Ursula Von der Leyen said a single, all-inclusive 15% tariff rate “for the vast majority of EU exports” to the US had been agreed, which would apply “across most sectors, including cars, semiconductors and pharmaceuticals”, though Trump seemed to suggest pharma was not part of the deal. She also said the two sides “have agreed on zero-for-zero tariffs on a number of strategic products (including) all aircraft and component parts, certain chemicals, certain generics, semiconductor equipment, (and) certain agricultural products”.

For the week ahead, the focus for markets will be on the Fed meeting (Tuesday/Wednesday). Interest rates look set to remain on hold – though there may be one or two high profile dissents in favour of cutting rates given recent comments by Fed Governors Waller and Bowman – so the markets will be watching for any clues about a possible reduction in rates at the following meeting in September.