EUR/USD: customs action and the US budgetary law

The EUR/USD, despite an underlying upward trend, lost a few pips on Monday, as traders were nervous as the July 9 deadline approached. The White House is expected to announce, barring a prior agreement, the tariffs it will apply to imports from European Union members.

The US President announced that he would send about ten letters to the countries affected by his tariff surcharges, which will vary in a range of 10-20% or could go as high as 60-70%. "We have some other negotiations, but you know, I would tend to send a letter to specify the tariffs they will pay," he also added.

The European Union is also in this phase of negotiations with the US administration, with a view to reaching an agreement before the fateful July 9 deadline. The highly unpopular and questionable European Commission President Ursula von der Leyen has stated that she wants a "negotiated solution."

"US trade policy represents a major challenge and is expected to continue to weigh on economic activity, particularly by curbing business investment decisions. Inflation in the eurozone is now well under control, and we are seeing a significant slowdown in wage growth. This environment allows the ECB to ease its monetary policy, thus cushioning the economic slowdown. Germany's fiscal shift also represents a key change for Europe, while the gradual implementation of defense and infrastructure investment plans should help cushion the negative shock from tariffs," comments Nadege Dufosse, Global Head of Asset Allocation at Candriam.

However, the dollar is unable to clearly reverse the trend, especially since the oversized budget bill, passed by Congress just before the national holiday, is having no positive effect on the greenback. "This observation is particularly striking because it reinforces the idea that the greenback's exchange rate is disconnected from the economic outlook, as has been the case since early April, despite the return of confidence illustrated by the soaring stock markets. Is this a transitory or lasting effect? ​​Beyond the short-term upheavals, the answer undoubtedly lies largely in the economic consequences of the tax reform, particularly in its ability to restore structural productivity gains, the only means of absorbing the additional budgetary cost in the long term. The game is not over yet," analyses Veronique Riches-Flores, independent economist.

The EUR/USD is currently trading at $1.1737.

KEY CHART ELEMENTS
The breakout from the technical straitjacket is confirmed, giving greater meaning to the support on the 20-day moving average (in dark blue).

The long position on the spot market can be maintained as long as the oscillations continue between this trendline and the upper limit of the Bollinger Bands (20;2.5).

The Relative Strength Index (RSI) is fully converging with prices.

MEDIUM-TERM FORECAST
In light of the key chart factors we have mentioned, our medium-term view is positive on the EUR/USD.

Our entry point is at $1.1730. The price target for our bullish scenario is $1.2464. To protect the invested capital, we recommend placing a protective stop loss at $1.1490.

The expected return on this strategy is 734 pips and the risk of loss is 240 pips.