The main event for Forex markets this week will be the G20 summit which gets underway in Japan on Thursday.
President Trump and Chinese leader Xi Jinping are scheduled to meet alongside the event. In the wake of the recent escalation in the US/China trade war, this has taken on fresh importance.
Trump Shocks The Market
In May, Donald Trump shocked markets when he announced that 10% tariffs on $200 billion of Chinese goods had been increased to 25%. The announcement came despite prior expectations that the two countries were close to agreeing on a deal on trade.
However, Trump said that the tariffs were a consequence of China taking too long to sign a deal and for allegedly backpedaling on negotiations. China responded in kind by raising 25% tariffs on $60 billion of US goods, adding that it would not “back down” to what it calls unfair US practices.
Tensions Boil Over
Following the tariff increases, tensions then increased further. Trump announced his addition of Chinese tech giant Huawei to the “Entity List”. This is a list of 44 Chinese companies prohibited from dealing with US firms unless they get prior government approval.
Following this move, China then rocked markets by suggesting that it could place restrictions on rare earths exports. These materials are used in many high tech applications and could pose a huge threat to the US economy if restricted.
Will We See A Truce?
The two leaders are due to discuss a range of topics at the meeting later in the week. But the main issues will be that of the blocking of Huawei and other Chinese companies, and of course, the trade tariffs.
Following China’s retaliatory tariffs, Trump threatened to tariff the remaining $300 billion of Chinese goods entering the US. Forex traders will now be hoping for a repeat of the last G20 meeting in November, where the two leaders were able to strike a compromise. This time, though, the compromise should aim to put an end to the trade war.
Powell Under Pressure
The escalation in tariffs has also taken a toll on central banks.
The Fed, which had been following a program of gradual policy tightening, has recently shifted its view. It is now signaling potential easing to come later in the year. Citing the negative impact of Trump’s trade war, Fed chairman Powell told markets that many policymakers now feel that some level of easing will be necessary in the coming months.
Indeed, the Fed chairman has been under a great deal of pressure over the year from Donald Trump. The President has constantly criticized him and called for lower rates. With China’s central bank easing further over the year, Trump has cited the need for the US central bank to ease in order to allow the President’s trade war to continue.
The prospect of fresh easing from the Fed and the subsequent weakness in USD has seen gold prices exploding higher over recent sessions. XAUUSD is now trading at levels not seen since 2013 after breaking out above the 1391.17 level. While above here, focus is on a further push higher targeting the 1432.21 level next. To the downside, any drop lower should find support into the 1366.09 level, keeping focus on a further move higher.