On Tuesday morning, forex markets reacted to a sudden flare of trade tensions between the US and France.
The EUR/USD pair currently trades at $1.1073, virtually unchanged from the morning’s opening rate.
The EUR is struggling to find support as investors awoke to the news that Trump intends to impose tariffs on $2.4bn worth of French exports.
The US was retaliating to France’s new digital services tax. The tax seeks to impose a 3% levy on digital companies with global revenue over €750m. The tax also aims to prevent firms from paying little tax in Europe by declaring their profits overseas.
However, the US claims the tax unfairly discriminates against large US firms such as Facebook, Amazon, and Google.
‘The USTR is focused on countering the growing protectionism of EU member states, which unfairly targets US companies, whether through digital services taxes or other efforts that target leading US digital services companies.’ said Robert Lighthizer, the US Trade Representative.
In the proposal, the US named several iconic French exports, including; cheese, handbags, and champagne- would face up to 100% tariffs.
The news soured sentiments that such tariffs could hurt the Eurozone’s already struggling economy.
Trade jitters side-line the US Dollar
The USD stuck trading in the narrow range amid subdued demands for the USD.
It comes after Trump’s recent escalation of global trade tensions spooked USD investors.
Not only has the US imposed tariffs on France goods, but it has also imposed new tariffs on metal imports from Brazil and Argentina.
USD investors are worried about the rising trade protectionism, which could hurt the US economy and force the Fed into making additional rate cuts next year.
USD to rally on robust economic data.
Looking forward, the EUR/USD exchange rates may start to come under pressure through the latter half of the weekly publication of several key US economic releases.
On Wednesday, we expect the ISM non-manufacturing PMI, which may buoy the USD if it reveals the US service sector continued to expand at a robust pace in November.
However, the US payroll report will be potentially more influential at the end of the week. Will, a robust expansion in employment prompt the USD to rally on Friday?
Meanwhile, the Euro could face some headwinds in the mid-week with the publication of the Eurozone’s own services PMI. The PMI is expected to confirm growth in the sector narrowed last month.