EUR/USD drops on tariff delay talk, stronger US inflation

Dollar strengthens as some tariffs on Chinese imports could be delayed

The euro remained resilient across the early European session, despite mounting evidence that the German economy is heading towards a recession. German ZEW sentiment data dived to -44.1, the worst level in seven years and an exorbitant miss, versus expectations of -28.5 and a previous print of -24.5. The figures point to a serious and significant deterioration in the outlook for the German economy; toxic cocktail of the recent escalation in US – Sino trade tensions, the increased likelihood of a no deal Brexit adding to already soft economic growth. 

Investors will now look ahead to German GDP data due for release tomorrow. The expectation is that the German economy contracted. However, with uncertainty from the US – Sino trade war expected to continue hitting demand for German exports, Europe’s largest economy could well be heading for a recession.

Dollar gains
The dollar rose moderately following the release of US inflation data. CPI increased to 1.8% yoy ahead of the 1.7% forecast. Core CPI, which excludes more volatile items such as food and fuel unexpectedly ticked higher to 2.2% yoy, ahead of the 2.1% forecast. However, the dollar strengthened considerably on the announcement that the US could delay tariffs on some Chinese imports until December. With little in the way of positive news surrounding the US – Sino trade dispute recently, investors were quick to react, pushing the dollar higher. 

Geopolitical concerns, (Hong Kong and China) in addition to ongoing trade concerns, and the impact on global growth, has been a central focus for dollar traders. Recession fears have been growing recently. An easing of trade tensions is a positive for the US economy. This, plus an unexpected tick higher in inflation is proving to be supportive of the greenback. 

EUR/USD levels to watch:
The EUR/USD is trading a range between $1.1250 and $1.1160 and is showing a reluctance to breakout. A move below $1.1160 could open the door to $1.1100 prior to $1.1025. On the upside, a break through resistance at $1.220 could see the pair move higher with more conviction to $1.1250, prior to $1.1280.

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