Daily Market Brief 3 April 2018

China Reacts to Trump’s Tariffs

April 3rd: Highlights

  • Beijing reaction increases trade war concerns
  • Sterling well supported
  • Euro pressured but well supported

Beijing reaction increases trade war concerns

China has reacted to President Trump’s addition of tariffs of 25% to U.S. imports of steel by adding tariffs of a similar level to their own import of several U.S. products. The move, heavily criticized by the President, increases concerns over an all-out trade war although the reaction China had been expected.

The tariffs on 128 items from pork to scrap aluminium show that China is not about to be cowed by Trump’s bluster and they have already confirmed that they will react in a similar manner to any further escalation. It is believed that President Trump will introduce further measures this week that will inflame simmering tensions.

The dollar’s reaction has been muted over the Easter holiday although it has lost ground versus the JPY as the new tensions affected risk appetite sending stock markets lower.

The dollar index, which closed on Thursday virtually unchanged from the previous close at 90.08, is set to react to the tension in the relationship between the two superpowers.

This week sees the release of the employment report for March which is expected to see a fall in new jobs created and a possible revision lower of the February headline while the pace of wage increases continues to pick up.

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Sterling well supported.

Continuing the trend that has been in place for some time, when Brexit negotiations go “behind closed doors” Sterling tends to rally taking on an optimistic view of the talks. Following the agreement of the transition phase despite the EU continuing to set out what it wants and the UK complying, the view of traders is that if there isn’t a complete breakdown in talks, the fact that Brexit is going to happen is now priced in and they are looking elsewhere for drivers for the UK economy.

A rate hike next month is also priced in with interest rate futures confirming those expectations. Sterling also trod water over the holiday period making a high versus the dollar of 1.4078 earlier this morning. Versus the Euro the pound has also rallied reaching 1.1428.

There is no significant data being released this week which could drive the pound so unless the Irish border question flares up, it is probable that Sterling will remain within its current 1.4100/1.3980 range.
The inflation report which is due for release on 17th April, will be the major focus this month with any further fall bringing doubt about the path of monetary policy. That will be followed by the March employment report the following day where the positive gap between incomes and prices will be confirmed.

Euro pressured but well supported

The single currency has recovered well from the discovery of a further ten billion Euros of bad loans in the Eurozone despite that issue being seen by the ECB as a problem for another day. It is likely that the comments by the Finnish Central Bank Governor last week in which he said that there could be a case for an increase rather than the expected tapering of the Asset Purchase Scheme, were a direct consequence of the discovery.

The ECB meets this seek and it is likely that there will be no change in either monetary policy or Mario Draghi’s dovish view despite Germany starting to add pressure for a normalization of rates. Tomorrow sees the release on Eurozone-wide inflation data which is expected to see inflation remaining steady if not falling marginally.

The Euro has been trading at the lower end of its recent range but unless the bad loan issue blows up in the short term, the 1.2260/1.2520 range that has been in place for some time is likely to remain since the current set of drivers are well known and unlikely to bring about a major change without the dollar having a significant influence.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”