Trade tensions remain the key theme in the markets at the start of the new week after Donald Trump's decision to raise the tariffs on all Chinese imports. Negotiations over the weekend ended without any concrete progress and the question now becomes what kind of response the Asian side will choose. The Dollar was rather unchanged on Friday, despite the lower than expected US inflation report, which may have provided some lift to equities that ended the week in positive territory. Gold advanced towards $1,290 but started the week on a low note dropping below $1,285 overnight while Oil saw no change.
With the US President reigniting the trade dispute with China, investors are looking for refuge in safe haven instruments, waiting for China's response to the US decision. According to Bloomberg, Vice Premier Liu He declared that the US needs to remove all extra tariffs on Chinese products and set targets for purchases according to demand, indicating that they don't intend to back down to Trump's arm-twisting. As a response, equity futures in Europe and Asia are pointing sharply lower and currencies look poised for a hesitant start of the week as well.
The Dollar was mostly unchanged during Friday's session, somewhat supported by the risk off bias. At the same time though, another piece of US inflation data printed lower, with the Consumer Price Index report coming in softer. This is now becoming a trend of bearish inflation reports that suggests that the Fed would have to cut rates sooner than later - a negative notion for Dollar bulls. The instrument that could benefit the most from the combination of a weaker greenback and safe haven demand is the Dollar/Yen: prices are currently holding around the 109.50 area but another day of losses in the equity markets could prompt a sell off towards 108.
The Euro and the Pound look particularly interesting given the combination of catalysts we mentioned above: on the one hand, the risk off sentiment hints towards a negative bias for both high beta currencies; on the other though, with inflation moving lower in the US, the Dollar looks vulnerable and that could be a boon for Euro and Sterling. Ultimately, it will be fresh data that will drive the near-term action on both currency pairs, until the broader risk environment clears: the ZEW Survey and UK employment report, both pending for release tomorrow, will act as catalysts during the early part of the week.
Gold trended higher towards the end of last week and almost made it to $1,290 but when the Asian markets opened for trading last night, prices dropped around $5. We have mentioned the importance of this area for the yellow metal in our recent notes, as a positive break above these levels nullifies the previous downtrend and puts Gold on track for a move towards $1,300; however, for that to take place a clear break above last week's $1,292 high is required. Oil extended its sideways move for yet another day and it's clear that traders prefer to sit on the sidelines at this stage, trying to assess whether the stalemate in the Sino-US talks will be temporary or the new status quo.
Equities ended the week in a positive note on Friday. It seems that the decline seen during earlier sessions had priced in the US decision to impose additional tariffs on Chinese goods, while the lower inflation report also contributed to a bullish short-term bias. This morning though, futures on both sides of the pond point lower, indicating that investors are again growing worried on what China's response will be, as a lengthy standoff will start taking a fresh toll on the domestic and global economies.
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Written by Konstantinos Anthis, Head of Research