EUR/USD declines as optimism grows over a potential de-escalation in the US-China trade war

EUR/USD is trading lower around 1.1350 during European trading hours on Friday, as the US Dollar (USD) resumes its recovery, driven by increasing optimism over a potential de-escalation in the US-China trade conflict.

The US Dollar Index (DXY), which tracks the Greenback against six major currencies, rebounds from a previous correction near 99.20, climbing to near 99.65. The index is now eyeing a break above the weekly high around 100.00.

Market sentiment improved following reports that China is considering suspending the 125% tariff on certain US imports, including medical equipment and industrial chemicals, as part of efforts to ease trade tensions. This comes after the White House expressed optimism that the US and China could soon strike a deal to end the tariff war. US President Donald Trump remarked that “discussions with Beijing are going well” and hinted that a deal could be reached soon.

However, China has denied any ongoing trade negotiations, with a spokesperson stating that “there have not been economic and trade negotiations between China and the United States.” Beijing also insisted that any trade talks would require the US to “completely cancel all unilateral tariff measures.”

On the US economic front, policymakers continue to voice concerns over the potential economic damage from President Trump’s uncertain policies. Minneapolis Fed President Neel Kashkari warned on Thursday that the uncertainty surrounding US trade and economic policies could lead to “business layoffs.” While Kashkari noted that businesses have not yet started cutting jobs, he cautioned that some are preparing for potential job cuts if the uncertainty persists.

Market Movers: EUR/USD and Eurozone Concerns

• The EUR/USD decline comes as the USD strengthens, though the Euro (EUR) remains stronger against most major currencies, except for North American currencies. However, concerns over Eurozone inflation continue to weigh on sentiment. The European Central Bank (ECB) has increasingly faced expectations of dovish monetary policy due to worries that inflation in the Eurozone could remain below the ECB’s 2% target.
• ECB policymaker and Finnish central bank governor Olli Rehn raised concerns on Thursday about the downside risks to inflation, suggesting that medium-term inflation projections could fall short of the 2% target under current conditions. Rehn also indicated that the economic situation “justifies an interest rate cut in June.”
• Meanwhile, Austrian central bank governor Robert Holzmann expressed concerns over structural weaknesses in the Eurozone economy, suggesting that fears of economic shocks will persist even if tariffs are reduced. Holzmann emphasized that “economic scars” could remain even with tariff reductions, a scenario that could lead to further easing of ECB monetary policy.
• The next significant driver for the Euro will be headlines from both the White House and the European Union regarding the potential development of trade relations across the Atlantic. Any new trade developments could influence both the Euro and the broader market sentiment.

Technical Analysis: EUR/USD Pulls Back to 1.1350

EUR/USD drops to around 1.1350 on Friday, but the overall outlook remains bullish, supported by the upward-sloping 20-week Exponential Moving Average (EMA) near 1.0885.

The 14-week Relative Strength Index (RSI) has risen to overbought levels above 70.00 on the weekly chart, signaling strong bullish momentum, though a potential correction could be on the horizon.

On the upside, the psychological level of 1.1500 stands as a key resistance point for the pair. On the downside, the July 2023 high at 1.1276 will act as critical support for the Euro bulls.