The trading week began restlessly: anti-risk sentiment unexpectedly increased in the market, after which the positions of the dollar, yen and the franc strengthened sharply, while other currencies (the commodity — in particular, aud, cad) plunged significantly. Such a dramatic change in the weather in the foreign exchange market is is a result of Donald Trump tightening his rhetoric, who has replaced “mercy with anger” about the prospects for the US-China talks.
The bellicose tweet of the US president became a bolt from the blue, since as early as Friday analysts were discussing positive signals from the negotiators. Among the traders there were rumors that Trump went to the meeting of the Chinese, pulling out many of the unresolved issues out of the box and thus showing unexpected flexibility in the negotiations. It was expected that Beijing and Washington would sign a historic deal this week, or at least mark the approximate date of the event. But now this question is again in the air.
The fact is that the US president said that this Friday, May 10, Washington will increase duties on a number of Chinese goods from 10% to 25%. It is worth quoting Trump’s tweet verbatim, so to speak, without cuts: “For 10 months, China paid import duties of 25 percent for high-tech products worth $50 billion to the US, and 10 percent for other goods worth $200 billion. And on Friday, 10 percent will rise to 25. Other goods worth $325 billion, supplied by China to the US, are not taxed yet, but will soon be at the level of 25 percent.” The end of the quote.
I note that over the past few months, Trump spoke about the negotiations either in a neutral or in a positive way. Therefore, such a sharp change of tonality had a strong impact on the markets. The euro-dollar pair was also among the “victims”: the price fell again into the 11th figure area, although in the Asian session the downward trend was rather vague: the pair only reached 1.1172, after which the initial downward impulse lost its force. At the same time, there is no trace of former optimism – macroeconomic events have faded into the background, while geopolitics has come to the forefront.
Although the European currency had the potential for its further growth, given the dynamics of key indicators. Let me remind you that over the past two weeks, there has been an increase in European and German inflation, an increase in eurozone GDP, amid falling unemployment. In turn, the US data showed contradictory dynamics – against the background of GDP growth, almost all inflation indicators were falling. In other words, the fundamental picture contributed to the EUR/USD’s further correctional growth.
But the threat of a renewed trade war changes a lot – and not only in the context of the euro-dollar pair. Central banks of the leading countries of the world in their communique on the results of recent meetings, as a rule, noted a decrease in geopolitical tensions, in light of the ongoing dialogue between Beijing and Washington. But if Trump implements his threats, some of the central banks (above all, the RBNZ and the RBA) will not be able to take a wait-and-see position anymore – regulators will switch to mitigating the parameters of monetary policy. And in any case, central banks will consider the risk of a slowdown in the global economy in their key forecasts.
The European Central Bank, which already takes a rather soft position regarding the prospects for monetary policy, will not stand aside. In particular, some of the regulator’s representatives allow the resumption of the incentive program. So, at the end of April, ECB Vice President Luis de Guindos did not rule out this possibility, after which the euro plummeted throughout the market. At the moment, such a scenario seems unlikely (QE is a rather ambiguous tool of monetary policy, therefore weighty arguments are needed to reanimate it), but in the event of a renewed trade war, such prospects will again be on the agenda.
Thus, the fundamental background for the EUR/USD pair has changed quite dramatically, allowing the bears to seize the initiative and pull down the price for a key support level of 1.1120 (the bottom line of the Bollinger Bands on the daily chart). Everything will depend on the development of further events.
According to some experts, Trump only “raises the stakes” before the crucial negotiations. On the other hand, rumors have already appeared on the market that China may cancel trade negotiations with the United States due to threats voiced – according to American journalists, Beijing is currently exploring this possibility. The intrigue in this matter will continue until May 8, when the next round of talks should take place. If the Chinese refuse to take part in them, the likelihood of the resumption of a trade war will increase in many ways. In this case, anti-risk sentiment will also increase, strengthening the dollar’s position throughout the market.
The material has been provided by InstaForex Company – www.instaforex.com