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Trade Tensions at G20

30th November 2018 Market Update

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🇺🇸 USD – The focus for the US Dollar going forward this weekend will be the G20 summit in Argentina that is kicking off later on today. Here it is expected that US President Donald Trump and Chinese President Xi Jinping will meet to discuss US threats to increase their current tariff levels on $200bn worth of Chinese goods from 10 per cent to 25 per cent, with additional levies also being discussed for the remaining $267bn worth of Chinese imports. Having already indicated earlier on this week that these protectionist measures are likely to be implemented, Trump then contradicted himself slightly yesterday in claiming he was ‘close to doing something’ with China – so who knows what to believe. If we see these measures being implemented, the Dollar would likely strengthen whilst also escalating the trade war between the economic heavyweights. On the other hand, an indication of an agreement to decrease the level of tariffs on Chinese exports to the US will cause the Dollar to weaken as it would likely cause a significant fall in Dollar safe-haven demand. This is after a week in which the Dollar has remained relatively weak due to a fall in the foreseen number of interest rate hikes in 2019, due to comments from a dovish Fed President, Jerome Powell. This is despite minutes from the Fed’s November meeting coming out yesterday which indicated that a December rate hike was still warranted.

🇬🇧 GBP – The old adage ‘no news is good news’ doesn’t apply to Pound Sterling at the moment as a lack of meaningful progress in Brexit negotiations is keeping the currency on the backfoot as it continues to trade towards the lower end of its current range. This is due mostly in part to the fact that investors are still betting on Theresa May’s failure to win approval for her Brexit deal in Parliament on December 11th. As such, the Pound fell towards two-week lows yesterday as fears of a ‘No Deal’ Brexit were whipped up by both the Bank of England and Theresa May respectively. It appears May’s method of persuasion will be to use the conduit of fear to scare the majority of her party into line. One person she has already convinced is Trade Secretary Liam Fox, who backed Theresa May’s deal on the Today Programme, claiming that he believes the PM is ‘changing the public mood’ on Brexit as she tours the country. Unfortunately, the people she needs to be persuading are in Westminster, as May continues to tout the fear surrounding the alternatives to her deal, as opposed to the positives of what is currently on the table. We expect headlines to dictate the short-term volatility of the Pound today and over the weekend.

🇪🇺 EUR – Inflation was the key headline out this morning for the Eurozone as CPI fell to 2 per cent year-on-year for November while Core inflation came in slightly lower than expected at 1.0 per cent year-on-year (vs 1.1 per cent expectations). In light of this, it is likely that the ECB will maintain their plans to end Quantitative easing in December but – the likelihood of an interest rate hike in 2019 (currently at 70 per cent according to money market futures) becomes less likely as a result of the perceived lack of growth in the Eurozone. Despite this, the ECB remain stoic in their defence of the economy as governing council member Patrick Lane yesterday encouraged investors to avoid being overdramatic in regards to the slowdown. Indeed, Lane has a point as the deceleration in November is likely to largely reflect recent developments in the price of oil whereby we have seen it fall from $73.38 p/barrel at the start of October, down to $50 p/barrel this week – which is a fall of 32 per cent that has caused inflation to stutter in the Eurozone overall this morning.

 

Summary:
USD: Focus turns to Argentinian G20 Summit where Trump is set to meet Xi Jinping on the topic of trade;
GBP: No significant progress has Sterling trading near the bottom of its current range;
EUR: ECB will hope upcoming inflation data will support their plans to end quantitative easing and increase interest rates in 2019.

 

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Ali Malik

Ali Malik

Ali is responsible for providing clients with relevant foreign exchange advice, daily reporting and pricing to ensure they are updated of all market moves. His experience includes working for Goldman Sachs, UBS and Lloyds Development Capital.

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