Donald Trump's intention to impose a fresh $200 billion round of tariffs on China and a barrage of hawkish Fed comments are putting the Dollar back in the driver's seat. Even though the US Retail Sales data missed on Friday, the greenback rallied versus its peers while the 10-year Treasuries hit 3% underpinning Dollar's gains. The Euro took the brunt of the hit while market participants are eyeing this week's inflation and PMI data to confirm or reject Draghi's recent optimism. Equities ended the week in the green on Friday but Trump's threat to pull the trigger on fresh levies against China is dampening sentiment this morning with futures pointing south.
The US Dollar is back on the ascendancy following Fed policymakers' optimistic remarks that see 4 rate hikes this year as appropriate and want to see more tightening next year as well. This comes on the back of a string of disappointing US figures with inflation, producer prices and retail sales all missing their marks so Dollar bulls are rejoicing that the central bank remains on course to raise rates regardless of this negative data. At the same time, Trump's intention to escalate the trade war with China - with an announcement of $200 billion tariffs expected as soon as today - is also pushing the Dollar higher; if the US President goes ahead and pulls the trigger more Dollar gains should be expected.
The Euro on the other hand came under pressure on Friday and the rally above 1.17 didn't last long. The shared currency dropped almost all the way to 1.16 and this week's data will be key in supporting Draghi's optimistic views during the ECB conference - and send the Euro back up again - or disappoint and force a deeper correction. The Eurozone inflation data is pending for release today and the PMIs are due for Friday; a positive reading today will help the Euro remain afloat but we need to be wary of Trump's announcement that could send prices lower again with 1.1530 appearing as the next support.
Sterling was able to withstand most of Dollar's pressure and managed to remain above the 1.3050 support when the greenback picked up pace on Friday. It's clear that the positivity surrounding the recent progress in the Brexit talks is supporting the Pound which still remains on a positive trajectory. The first 48 hours of the week are empty of any important UK data so we need to wait until Wednesday's inflation report to get some fresh insight on the domestic economy. As such, Brexit will remain the key driver unless Trump imposes tariffs on China which should put more pressure on the Pound but as long as the 1.3050 support holds we remain bullish over the UK currency.
Commodities have been rather volatile during recent sessions with Gold oscillating on either side of the $1,200 area while Oil tries to build some momentum to overcome the $70 barrier. For Gold, Dollar's price action has been the driver and will remain so; on Friday greenback's rally pushed prices to $1,195 and a further retreat will take the yellow to $1,185. Oil pulled back from its $70 highs but as long as it remains above $67.50 another run towards the $71 resistance remains likely.
Equities ended last week on positive ground as investors were happy that Trump hadn't imposed new tariffs on China but news that he might do so as early as today is pushing futures lower this morning. Last week's positivity allowed the European indices to find a bottom but that could all go away if the US President escalates his dispute with China. A $200 billion salvo is not a small thing and investors will begin to contemplate whether this - and China's response - will start having a serious toll on global growth. If the US markets push lower on the back of any news on this front then their European counterparties will follow suit and break below recent lows.
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Written by Konstantinos Anthis, Head of Research