USD hardly profits from rising trade tensions

KBC Market Research Desk KBC Bank

The euro outperformed on Friday, but the market reaction to the data was a bit remarkable. EUR/USD didn't profit from a jump in EMU inflation (1.7% headline, 1.2% core), which was considered temporary. Later, US payrolls showed strong job growth, but the dollar also failed to profit as wage growth disappointed again. The US currency even lost further ground as the US non-manufacturing ISM unexpectedly dropped. (FX) markets keep the view that the dollar is at risk to lose interest rate support if US inflation stays as tame as it was of late. EUR/USD closed at 1.1198. USD/JPY finished at 111.10.

This morning, the positive (goldilocks-like) sentiment in the US on Friday is abruptly overthrown as president Trump said he might raise tariffs on Chinese good as soon as Friday. The tweets are causing doubts on a positive outcome of the US-China trade talks. Asian equities and the yuan (USD/CNY 6.78) are suffering heavy losses. AUD/USD dropped below 0.70. The yen strengthened to the USD/JPY 110.30 area, but gains eased later. The euro is holding up well. EUR/USD is still changing hands in the high 1.11 area.

Today, there few important data in the US and EMU. The focus will turn to the US-China trade war. The yen will probably outperform. The impact on EUR/USD is not that evident. The EMU economy proved very sensitive to global trade tensions. So, an escalation in the trade war might be a euro negative. At the same time, a risk off correction might lead to lower US yields (less interest rate support for the dollar). If trade tension escalate further, US president Trump might also threat to use US the dollar as weapon. As always, we keep a close eye at the EUR/JPY price action in a risk-off context. However, we have the impression that the negative impact on EUR/USD might be limited for now. The price action on Friday also suggested that the bar for sustained USD gains might be quite high. We maintain the view that the EUR/USD 1.1110 support area won't be that easy to break.

On Friday, sterling gained further ground on headlines/rumours that the negotiations between UK government and labour might lead to an agreement on a rather soft Brexit (customs union). EUR/GBP dropped to the 0.85 area. However, comments during the weekend suggested there is still quite some distrust between the two parties. UK markets are closed today. For now, we don't expect sterling to get additional support from investors anticipating a political agreement on Brexit.

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KBC Market Research Desk

KBC Bank

KBC's Market Research Desk publishes a number of short-term reports.

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