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Trump pulls trade trigger

18th September 2018 Market Update

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?? USD – The US Dollar was marginally down this morning following last night’s announcement from President Trump’s administration declaring the implementation of a third round of tariffs against China. These tariffs were implemented at a rate of 10% on $200bn worth of Chinese goods; a number which will increase to 25% in January 2019 unless China offers more concessions on trade. As a result, the market is now watching closely to see how China responds, following their previous threats to hit back with countermeasures. What is interesting, is that despite these being deemed ‘trade wars’, a solution at present looks slim given that there is very little talking going on between parties, with China presently refusing to join the US at the negotiating table.

As far as Trump in concerned, the aim is to increase the costs of international goods thereby encouraging consumers to buy American which should in turn help the economy to grow, whilst also serving to reduce the large US trade deficit. The flipside is of course that businesses would see their international costs increase as evidenced by the fierce opposition we have already seen towards the tariffs from global tech giants such as Apple, Dell and Hewlett Packard. At present the Dollar appears to have taken the impact of the tariffs in its stride, and with a relatively light US data calendar today – USD focus remains on how China responds.

?? GBP – Yesterday saw the Pound hit a six-week high against the Dollar due in part to a weaker Dollar but also following reports of progress around the Irish border question, a long-standing obstacle that diplomats hope will be resolved at this week’s European Summit. The latest solution coming out of May’s government involves a high-tech border which would use barcodes on shipping containers under the ‘trusted-trade’ schemes administered by registered companies, thereby removing the need for a new border infrastructure. In addition, more positive Brexit sentiment came out yesterday as the EU Council claimed that parts of the Brexit draft had been ‘agreed in principle’ as both parties continue to conduct negotiations in a ‘spirit of good cooperation,’ according to Michel Barnier. The hope for those with large amounts of Sterling would be that following the official signing of a deal, Sterling would make back some of its post referendum losses. Until then, we are seeing it fluctuate off the back of a positive or negative soundbite, as opposed to anything concrete.

?? EUR – The Euro has remained fairly stagnant in recent months given the steady course being run by the ECB which has maintained its aim to end its QE program in December with a rate rise being earmarked for the end of summer 2019. In the near term – concerns over the upcoming Italian budget which is to be submitted to the European Commission for approval on 27th September, have the potential to weaken the single currency. This is after markets were roiled when Italy’s coalition government made up of the anti-establishment 5-Star Movement and right wing La Lega parties announced controversial spending intentions in June this year. It is hoped that Finance Minister Giovanni Tria, who is seen as a moderating influence in government, will avoid too much confrontation between Italy and European lawmakers with his proposed budget. If he is unsuccessful, we could see the Euro weaken most notably due to what would be an inevitable increase in Italy’s budget deficit.

 

Summary: 

  • USD: Trump pulls the trigger on his latest round of tariffs against China; markets are awaiting Chinese response. USD has remained steady in response;
  • GBP: More progress being made in Brexit negotiations around the contentious Irish Border issue. Positive sentiment out of the EU Summit tomorrow could see Sterling strengthen further;
  • EUR: Holding steady but Italian budget issues hold the potential to do some damage.

 

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Darren Kilner

Darren Kilner

Darren is Head of Dealing at FairFX. Darren lives and breaths FX, his Mastermind topics are G8 currencies and economic forecasts.

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