The trade truce agreed between the US and China sent the Dollar and equities higher at the start of the week. The likes of the Euro, Sterling and the commodity currencies came under pressure while the Yen and Gold opened with a gap lower, indicating that traders are growing slightly more optimistic. With the G-20 meeting now behind us, market participants will focus on fresh data from around the globe to assess what’s next, with the US non-manufacturing ISM report due tomorrow among the key events.
In the interim though, our attention falls on the Euro today after the shared currency dropped below the 1.13 mark yesterday. The advance of the greenback tells only half the story for the Euro that is seeing increased selling pressure as the European leaders are trying to agree on who will take over the top jobs in the Union, a debate that seems to be going nowhere at the moment. At the same time, the PMI data printed on Monday displayed how difficult conditions are in the Euro area and a soft German retail sales report earlier this morning did little to offset the bearish sentiment.
Also worth noting, the US ISM Manufacturing PMI printed stronger yesterday. The market was pricing in a rate cut by the Fed during the July FOMC meeting, but if the US showing signs of improved performance then Jerome Powell may have to delay any possible rate cuts, further pushing the shared currency to the downside. Tomorrow’s non-manufacturing ISM reading will be telling.
Meanwhile, the Dollar edged higher over the past 24 hours following the weekend news indicating China and the US will resume trade talks. Dollar/Yen traded with a positive bias as equities soared worldwide and Treasury yields ticked higher, adding to the bullish case for the pair, alongside better than expected US ISM Manufacturing PMI numbers. However, earlier this morning, the US proposed $4 billion in potential additional tariffs on the European Union over aircraft subsidies, which dented the market sentiment as traders rushed back to the Yen after they realized that they are not in the clear yet. It will interesting to see whether Trump will now focus his trade war agenda on Europe, especially after he criticized Mario Draghi’s comments last month, when the head of the ECB suggested that additional easing would be needed if conditions didn’t improve.
Gold opened lower on Monday and prices moved below the $1,400 mark as investors rejoiced on the positive outcome of the G-20 meeting in Japan. Following the temporary easing of tensions between the two superpowers, the question we really care about it whether this development will lead the Fed to leave interest rates unchanged for now and Gold’s medium-term outlook hinges on that decision. As we mentioned above, fresh US data during the current month will be crucial in forcing the US central bank to act or allow them to stay put. As such, the ISM report due tomorrow will be a key piece of data and a strong reading could drive the yellow metal further to the downside.
Equities were positive around the world and the first trading day of the week was all about gains. Market participants responded positively to the news that the US and China will resume trade talks but this doesn’t mean that the problem is solved. It’s clear that the tariffs already in place will continue to take a toll on global and domestic growth and with Trump now turning his attention on Europe, the early bullish bias seems to ease again. Equity futures in Europe and the US are pointing towards only a marginally positive opening bell so it will be important to see how the EU tariffs’ story develops.
MARKET EVENTS TO WATCH
- UK Construction PMI - 12.30pm
- BoE Governor Carney Speaks in Bournemouth, UK - 6pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research