- US/China trade tensions herald potential for US/Europe trade tensions

- Heightened risk of short-term Euro sell-off seen by KBC Markets

- But "all-out trade war is unlikely" says GWM Investment Management

Image (C) Pound Sterling Live

One of Europe's leading lenders has told clients they have turned cautious on the Euro on a combination of global trade tensions and softer sentiment in the wake of the ECB's June monetary policy event.

KBC Markets - a division of the Belgian-based KBC Group NV which boasts 11 million clients - have said there is a heightened risk of a further near-term sell-off in the Euro exchange rate complex which could allow the Dollar and British Pound to make advances.

"For now, the Euro stays out of focus, probably as current battle is mainly a US-China issue. Still, Europe/European growth might soon feel the fall-out from this conflict and also become a target. So we stay cautious on the Euro as this conflict develops," says analyst Piet Lammens with KBC Markets in Brussels.

Global markets have endured a torrid week thus far, thanks to Donald Trump proposing an additional $200 billion worth of Chinese products to be targeted with a 10% tariff.

"There is little sign that Trump is about to give up, with Chinese negotiations clearly sending out a message to the EU, setting a precedent to their discussions," says Joshua Mahony, Market Analyst with IG in London.

Euro at Risk Against Both the Dollar and Pound Sterling

When markets are focussed on global drivers, as is the case in the current trade spat, what happens to EUR/USD often has a bearing on EUR/GBP.

This is therefore the feed-through mechanism by which the global trade spat can work on the Pound-to-Euro exchange rate's favour; a classic example of this mechanism in action was seen on Tuesday, June 19 when markets were almost completely fixated on the trade issue and GBP/EUR was seen to be on the rise.

Furthermore, KBC Markets believe European growth might soon feel the fall-out from this trade conflict as Europe becomes a target and the exporting powerhouse that is Germany sees the potential for lower growth rates further out.

"The conflict is at risk to escalate further," says Lammens.

But, it's not just the Sino-American trade headache that keeps KBC Markets weary of the Euro.

"After the last week’s ECB meeting, we turned cautious on the Euro," says Lammens.

At the June 14 event, the European Central Bank's message on future policy moves sent the Euro into a slump as markets now believe interest rates will not rise in July 2019 and will in fact remain on hold "through summer".

"The ECB probably makes that the Euro won’t receive interest rate support soon," says Lammens.

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Forecasts for the Euro vs. The Dollar and Pound

Concerning the outlook for the Euro vs. Pound exchange rate, Lammens sees a broadly sideways-orientated range remaining in play; an observation that we and many market commentators and analysts would readily agree with.

The forecast range for EUR/GBP lies between 0.8725/0.8843 which gives a Pound-to-Euro exchange rate range of 1.1461 and 1.1380.

Therefore should the Euro struggle, as per the views issued by KBC Markets, the top-end of the range might just come into play over coming days and even weeks.

Longer-term, we would not expect the 'trade war' theme to be a persistent drag on markets, or the Euro and therefore would expect this to be a short-term theme that won't last more than a matter of weeks.

“Despite all this tit-for-tat posturing, an all-out trade war is unlikely to ensue because it will not benefit anybody, especially China whose economy is going through a major deleveraging process. It should also be noted that China will soon run out of US goods on which to impose retaliatory tariffs which will move this negotiation to a more sensible and constructive forum," says Chris Payne, Managing Director at GWM Investment Management.

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