Dollar gains, euro slips after U.S./EU trade agreement

Investing.com - The U.S. dollar surged Monday, while the euro slipped back, after the U.S. and the European Union reached a trade agreement, ahead of this week’s Federal Reserve meeting.

At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, gained 0.4% to 97.815, but was still on course for a weekly drop of around 1%, its weakest performance in a month.  

Dollar boosted by trade deal; Fed looms large 

U.S. President Donald Trump and European Commission President Ursula von der Leyen announced a deal in Scotland over the weekend, with the agreement providing for an import tariff of 15% on EU goods, half the rate that was threatened to take place at the start of next month.

Trump added that the EU also plans to invest about $600 billion in the United States and dramatically step up purchases of American energy and military equipment.

The pact is similar to one forged with Tokyo negotiators last week for Japan to invest some $550 billion in the United States and a 15% tariff imposed on its cars and other imports.

As concerns subside about the economic fallout from punishing tariffs, investor attention is shifting to key economic data and central bank meetings in the next few days, particularly by the U.S. Federal Reserve.

“The U.S. macro data includes jobs data (JOLTS Tuesday, NFP Friday), a likely bounce back in second quarter GDP on Wednesday and stickier inflation on Thursday (June core PCE), which should tick back up to 0.3% month-on-month,” said analysts at ING, in a note.

“This should leave the majority of the Federal Reserve comfortable in their patient position on interest rates (FOMC meeting on Wednesday) and see a further pricing out of the prospects of a September Fed rate cut.”

Euro retreats further 

In Europe, EUR/USD fell 0.5% to 1.1688, with the single currency retreating further from the near four-year high it touched at the start of the month after the announcement of the trade deal between the European Union and the U.S..

“With a speculative market already reasonably long euros and a 2% per annum cost of carry against the dollar to deal with, we do not see the case for EUR/USD to immediately push through the highs at 1.1830,” said ING.

“Instead, we have a bias for EUR/USD drifting below 1.1700 and perhaps all the way to 1.1600 if the Fed continues to resist pressure to cut rates this Wednesday.”

The European Central Bank left its policy rate unchanged last week, and attention now turns to the release of second-quarter GDP on Wednesday, and the eurozone July flash inflation print on Friday as investors try to weigh up the possibility of a rate cut in September.

GBP/USD dropped 0.2% to 1.3409, slipping lower with the British economy facing major difficulties and the government likely to raise taxes in the autumn to boost its coffers.

“We favor a retest of decent support at 1.3370, below which losses can accelerate – perhaps all the way to 1.3150 if the US data/FOMC event risk this week is dollar positive enough,” said ING.

Yen slips ahead of BOJ meeting

Elsewhere, USD/JPY traded 0.4% higher to 148.25, with the Bank of Japan expected to hold interest rates steady on Thursday amid global trade certainty and domestic political flux.

Analysts believe that the U.S.-Japan trade deal signed last week would provide some room to policymakers to raise rates again later this year.

Still, investor sentiment in Japan remained cautious amid ongoing political uncertainty, following the ruling coalition’s defeat in last week’s upper house elections and speculation over Prime Minister Shigeru Ishiba’s potential resignation.

AUD/USD dropped 0.7% to 0.6521, handing back some of last week’s hefty gains, while USD/CNY gained 0.1% to 7.1738.