The smouldering trade war is and remains the dominant subject for the financial markets, and has caused considerable movement in the CNY and USD exchange rates over the past few weeks. Interestingly, investors seem to be sparing the euro so far though. The lack of reaction in the euro exchange rates may be due to the fact that the conflict between the US and the EU has not intensified so far. However, what is bizarre about that in my view is that the euro zone economy is the only one that is already notably suffering as a result of the tariff conflict. Sentiment amongst European companies has deteriorated significantly recently which is most likely to be due to the fact that concerns in connection with a trade conflict with the US are on the up. As a result euro zone experts assume that the leading indicators in July have fallen further. Should the PMIs reflect a stronger than expected collapse today the trade conflict might increasingly become an issue for the euro as well; and particularly so if the upcoming visit of the head of the EU Commission Jean-Claude Juncker in Washington does not lead to a solution of the conflict. The prospect of some first steps towards normalisation on the part of the ECB no doubt provided important support for the euro over the past months. However, that is likely to be increasingly questioned if the euro zone economy was to slow down more significantly as a result of the trade conflict.
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