The intensifying trade tensions between the United States and China simply added to market jitters, consequently weighing heavily on emerging markets. While the prospect of higher U.S. interest rates is likely to stimulate fears of capital outflows from emerging markets, global trade concerns present a major risk.
FIFA has trumped forex so far in trade this week, with the major currencies consolidating in relatively tight ranges against one another. The U.S. dollar is consolidating against its rivals so far today, gaining ground against the commodity dollars and pound sterling but losing ground against traditional safe havens such as the yen and Swiss franc.
It is expected that the latest installment of concerns over the United States and China entering a potential trade war will encourage global stock markets to come under pressure this week. Some indications of risk aversion are already being seen in the markets, with the Japanese yen gaining as a result of market uncertainty and a number of different Asian currencies trading lower due to reduced investor appetite.
Well, it’s official, the Trump Administration has slapped a 25% tariff on 818 Chinese goods, with a total value of up to $50 billion. This action comes on top of the recent decision to impose steel and aluminum tariffs on many U.S. allies, including Canada, Mexico, and the European Union.
The U.S. dollar gained against all major pairs this week. A hawkish Fed and a dovish European Central Bank (ECB) gave the edge to the American currency. U.S. President Donald Trump scored diplomacy points in Singapore by meeting with North Korean leader Kim. Trade war fears were once again at the forefront as the Trump administration announced new tariffs on Chinese goods on Friday. Crude oil prices plunged as supply might be on the rise with heavy anticipation on the Organization of the Petroleum Exporting Countries meeting on Friday.
The euro/British pound (EUR/GBP) currency pair could be on the verge of a breakdown after the European Central Bank’s policy decision on Thursday. While the central bank’s plan to end quantitative easing programme at the end of the year was a hawkish development, investors had already priced in that decision.
Although the European Central Bank is widely expected to keep monetary policy unchanged in June, investors are likely to be more concerned with the latest economic growth and inflation forecasts. Expectations remain somewhat elevated over the ECB potentially signaling an end to (quantitive easing) QE at the meeting. While hawkish comments from ECB officials and accelerating inflation have fuelled speculation over QE coming to an end, this could be a classic case where markets may be setting themselves up for disappointment.
Gold faces an important few days as three major central banks announce their respective policy decisions. All bar one is expected to make a rate change and that’s the Federal Reserve today. According to the to the CME’s FedWatch tool the probability of a 25 basis point rate increase is 96%, which means it is more or less already priced in. That may help explain why the dollar has stopped going up since the end of May.
With a rate hike in June considered a done deal, investors may be more concerned with the economic projections and press conference with Fed Chair, Jerome Powell. Markets are poised to closely scrutinize the Fed’s monetary policy statement for clues on how fast the Fed may raise interest rates during the second half of this year.