Richard Franulovich, the head of FX strategy at Westpac, notes that the latest escalation in trade tensions has short-circuited what appeared to a notable breakdown in EUR/USD through key supports.

• “EUR//USD downside has been a tough slog for some time, the region’s record strong basic balance surplus arguably a key factor containing meaningful downside.
• But even as EUR/USD may have dodged a bullet, the upside is constrained.
• The region’s growth engine continues to sputter; the 1.5% slump in German IP in June underscoring yet further weakening momentum. That, resurgent trade tensions and Brexit will add further pressure on ECB President Draghi to act decisively in September.
• Concerns about a lack of ECB policy space are overdone, their Sep 12 meeting likely to feature rate cuts (and mitigating measures such tiering), a restart of QE and another extension of forward guidance.
• EUR rebounds into 1.13/1.14 likely to stall.”