Contradicting earlier signs that a deferral might have been in the cards, US President Donald Trump went ahead and raised the tariffs on Chinese imports this morning. Even though the negotiations are still ongoing and Trump was pleased to receive a “beautiful letter” from President Xi, he decided to impose higher levies on $200 billion of Chinese goods, raising the rate to 25% and further dampening risk sentiment. Meanwhile, the Dollar dropped lower yesterday after the softer US PPI report, which elevates the Consumer Price Index figures' importance, pending for release today. Equities in Europe point higher but their US counterparties are in the red, Gold advanced while Oil continues to tread water.
President Trump's decision to proceed with more tariffs on Chinese imports indicates that the “bras de fer” between the world's two largest economies has now reached a different level. Despite the Chinese side's calm reaction to his threats and the negotiations still taking place, the US President doubled down on his attempt to put pressure on China by pulling the trigger. Whether this is just a “re-raise” on what may have been a bluff targeted to bring China to submission or whether he's actually willing to undo months of progress remains to be seen but what's certain is that by going “all in”, Trump raised the odds of the game - and the likelihood of retaliation from China - potentially leading to a breakdown in talks.
Safe haven demand drove Dollar/Yen to new lows yesterday, hitting 109.50 before bouncing slightly higher, and when traders sit down at their desks this morning, more downside is possible. We have highlighted the importance 109.80 support in our notes throughout the week and given that Trump made good on his word and raised the US tariffs, a potential move below this area would signal more weakness. Going forward, the currency pair will take its cue from fresh developments on the trade war front but also from the release of the US CPI figures. Economists are expecting a positive reading but following yesterday's softer than expected PPI report, the risk for the inflation data lies to the downside - and so it does for Dollar/Yen too. Barring a positive CPI report which would offset the bearish bias in place, a break below 109.80 exposes the 108.50 and 108 levels,
The Euro was able to score solid gains versus the Dollar yesterday when the US PPI report printed softer than predicted and prices rallied to 1.1250. Now, the 1.1250-60 area is a key resistance for the shared currency as a potential move higher puts the downtrend seen during April on pause but for this to take place we would need a set of bearish US inflation figures and an improvement in the trade dispute - a combination that looks less likely right now. As such, we remain cautious and still think that the odds favor a move towards 1.12; if we are proven wrong and the Euro advances above its near-term resistance, the next area of focus lies around the 1.1320 mark.
Sterling climbed above 1.30 during the past 24 hours on the back of the greenback's decline. Today the spotlight will fall on the release of the UK GDP numbers, where a positive reading is expected given the recent robust retail sales data. In this case, the Pound may proceed higher with the level to watch being the 1.3080 area. However, whether these gains could be sustained will also be decided by the US inflation report, where an uptick in prices' pressures could drive the Pound lower again while a miss will extend Sterling's rally towards 1.3130.
Gold retained its short-term bullish bias yesterday coming off the $1,280 area to trade $5 higher. Having said that, it's interesting to see that the yellow metal hasn't really gained on the back of the elevated trade tensions, having climbed only $8 from its weekly lows. Does that indicate the investors are pricing in a resolution in the trade dispute soon? It remains to be seen but what's certain is that a potential breakdown in talks between the US and China will reignite the demand for Gold and a break above the weekly $1,292 high points towards $1,302. Oil edges higher this morning, despite the US tariffs threatening to slow down global growth and demand for the black gold; nevertheless, a move above $63 is needed for momentum to pick up and prices to head towards $65 again.
Finally, equities seem to be taking the US President's decision to pull the trigger on the increased tariffs on China in their stride. Even though the European markets closed around 2% lower yesterday and the US indices moved 0.4% in the red, this morning futures in Europe point towards a bullish opening bell with their US counterparts only marginally below water. Do investors project their hopes that the two sides will continue talking until they find a solution? Possibly, but what could quickly turn the tables and drive stocks lower again would be China's retaliation or - even worse - a decision to withdraw from the talks altogether. As a final word though, we need to keep an eye on the US CPI report too as a softer reading will bring the discussion of US interest rate cuts back to the forefront and equities may get a welcome boost.
MARKET EVENTS TO WATCH
- UK Gross Domestic Product - 12.30pm
- US Consumer Price Index - 4.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research