MUFG's Derek Halpenny highlights Europe's economic resilience following Germany's upward Gross Domestic Product (GDP) growth revisions but warns that potential European Union (EU) import restrictions and additional tariffs on Chinese goods could escalate trade tensions and weigh on the Euro (EUR). Meanwhile, continued Chinese Yuan (CNY) strength could put further downward pressure on EUR/CNY.

Euro steadies as China tensions grow

"Still, we continue to see evidence of economic resilience in Europe that could help stabilise the euro at these lower levels. The Economy Ministry in Germany yesterday revised up its GDP growth projection from 0.5% and 0.9% for this year and next to 1.3% and 1.1% respectively. Growth had been downgraded in response to the war but the new estimate for this year is above the 1.0% estimate at the start of the year underlining the level of resilience."

"There has been speculation that Europe is soon to respond with agreeing to a more flexible trade policy mechanism that would allow for easier implementation to counter against huge imports to Europe from China. An import cap could be agreed as well as additional tariffs that could see trade tensions rise and prompt retaliation from China. These talks could be the final opportunity to avoid increased tensions."

"An escalation into grater trade conflict could be another EUR negative factor."

"This mounting pressure looks to be encouraging China too allow renewed gains. Recent PBoC fixing in USD/CNY indicate a desire to keep CNY on a strengthening path despite the broader gains for the dollar. EUR/CNY is 10% lower from the January high and we see near-term scope for further declines."

"The continued CNY strength is helping isolate Asian currencies from the broader dollar gain. While the DXY has advanced 3.3% from the September low, the dollar against a basket of Asia FX is just 0.7% higher."

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