EUR/USD Forecast: On the edge of the cliff as Trump launches a new trade war

US President Donald Trump has strengthened his reputation as "tariff-man." Shortly after making the necessary preparations to ratify the new North American trade agreement that he christened as USMCA rather than NAFTA, he announced new tariffs on Mexico –potentially violating the accord. The US will impose a flat 5% levy on all Mexican goods entering America on June 10th, quintupling to 25% in October as a punishment for allegedly allowing central-American migrants to flow into the US.

Markets did not respond kindly. Stocks in Asia and Europe are on the back foot, and so are risk currencies. The rout extends beyond the Mexican peso and also hits the Canadian dollar among others. The Japanese yen and the US dollar are the winners – with the latter rising despite falling yields which make it less attractive.

Developments on the main trade front are not encouraging either. China is reportedly gearing up to limit rare earth exports to the US and its counter-tariffs on US goods kick on Saturday. The trade war is already taking its toll – the official Chinese manufacturing purchasing survey dropped to 49.4 points in May, indicating further slowdown down the road.

The US economy continues growing at a robust pace, but not without issues. Revised US GDP figures for the first quarter showed the economy grew by 3.1%. However, the core inflation component was downgraded from 1.3% to 1.0%. The absence of significant inflation exposes a weakness in the economy. 

Markets expect the Federal Reserve to cut interest rates in response to low inflation, but Fed Chair Jerome Powell described weak price development early in the year as transitory. His words will come to a test later today, with the publication of the central bank's preferred measure of inflation – the Core PCE Price Index for April, which is projected to advance. 

Inflation data is also due in the old continent. Germany's states will publish their data throughout the morning. The data feeds into the all-European data on Tuesday – critical input for the ECB's decision next Thursday. 

Trade issues will likely top the agenda, and Europe is not immune to Trump's wrath. The US and the EU have not made any progress in trade talks and the administration threats tariffs on European cars. German Chancellor Angela Merkel criticized Trump in her commencement speech at Harvard University on Thursday. Her words will echo today.

EUR/USD has been trading in a narrow range in recent hours, but this may change abruptly as the month draws to an end and money managers scramble to adjust their portfolios ahead of the deadline.

EUR/USD Technical Analysis

EUR/USD is suffering from downside momentum on the four-hour chart, the Relative Strength Index (RSI) is leaning lower, and the currency pair is trading below the 50, 100, and 200 Simple Moving Averages – a decisively bearish picture.

Initial support awaits at 1.1115, which was a swing low on Thursday. 1.1107, the 2019 low closely follows it. Further down, we find levels that were last seen in 2017: 1.1025 and 1.109.70.

Initial resistance awaits at 1.1145 that held EUR/USD down in recent days. Next up we find 1.1175 that was a separator of ranges earlier this week, and finally, 1.1218 that was the high point this week.