EUR rally 'overdone' as EU economy set to take a hit from EU-US trade deal

In line with our projections, the euro has fallen towards the 1.14 level on the dollar this week, with the EUR/USD exchange rate having now shed almost 3% of its value in the past seven days.

The overriding feeling among markets is that EU leaders effectively caved to Trump’s demands during trade negotiations, and that the recently agreed deal will bring nothing but pain for the EU economy.

We put this down to a combination of factors, namely a lack of unified resistance among EU members, the vulnerable state of the bloc’s economy (which can ill-afford the hit from extortionate tariffs) and fears that a “no deal” scenario could have triggered a full-blown trade war and a European recession.

At any rate, investors have clearly viewed the euro rally as overdone in light of the unveiling of the one-sided trade agreement, and the recent retracement probably brings the currency back down to levels that are closer to fair value.

It will be a while before we see any impact of the agreement on economic data (the August PMIs won’t be released until 21st August). Communications from ECB officials will now be very closely watched in the interim, albeit August is an unsurprisingly quiet month on that front.