The global markets rout continued on Friday, with European shares slipped to fresh two-week lows amid a widespread risk aversion. Another blow for stocks came from Donald Trump’s plan to impose new tariffs of 25% for steel and 10% for aluminum. The sell-off has intensified after the President tweeted that “trade wars are good and easy to win”. As a result, the British FTSE 100 dropped 0.38 percent to 7,087 points, the French CAC 40 shed 1.24 percent to 5,159, and the German DAX lost 1.22 percent, to 11,913. The U.S. stocks are poised to open sharply lower, with futures for the Dow Jones Industrial Average gave up over 200 points, or almost 1%.
Following the recent recovery from three-year lows, the US dollar has to retreat against a basket of currencies on the back of renewed protectionist rhetoric by Trump. Many countries have already expressed their concern over the Washington’s behavior. In particular, China urged US to follow trade rules, Australia labeled the tariffs as “disappointing”, and German government rejected the Trump’s plan. Clear signs of escalating trade tensions are obviously playing against the American currency which remains vulnerable despite a hawkish Fed. The renewed dollar sales open the way for regaining the bullish momentum in the EURUSD pair. However, the single currency is unlikely to go much higher from the current levels around the 20-DMA at 1.2320, as it faces political risks in the region – the Italian general election and Germany coalition decision both due on Sunday.
The GBPUSD struggles to regain a steady bullish momentum, despite the dollar’s decline. The recovery attempts are capped by the 1.38 mark as the pound is nervously expecting Theresa May’s testimony on the post-Brexit plan and future relations between the UK and EU following the official “exit”. As the risks are high, traders prefer to sell the pair at higher levels in order to reduce the exposure to the potential “hard” Brexit. Should the prime-minister take a hard-line approach, GBPUSD could test lows around the 1.37 threshold.
USDJPY slipped to fresh lows below 106.00 and is already approaching the next psychological level. In addition to aggressive risk aversion, which traditionally fuels yen demand, the Japanese currency received a boost from the Bank of Japan Governor testimony as Haruhiko Kuroda hinted that the regulator will start discussing the ways of exit its massive monetary stimulus program around the fiscal year starting in April 2019. The yen bulls were impressed as this was the first time the Governor mentioned any timing for changing its course. As the pair dived below the important support at 105.50, further losses are on the cards now.
Commodities also suffered from Trump’s tariffs intentions. Brent crude oil is bleeding for a fourth day in a row and trading at two-week lows above the 63 mark. Prices are lower mostly on the back of a widespread risk aversion. Besides, traders continue to weigh the risks from the US shale revolution. In this context, today’s weekly Baker Hughes report will give fresh clues on the drilling activity in the country. Another growth in the oil rigs number could add the selling pressure on Brent which needs to keep above the 63 support in order to shake-off some weakness. A break below this level will open the way to lows for 2018 at 61.70.
Meanwhile, gold is finally benefiting from risk aversion coupled with greenback’s slide. The yellow metal regained the $1,320 level and trying to extend the bullish momentum. However, gains remain limited and prices are still 0.6% lower on the week as the recent sell-off was too aggressive. Gold could increase its attractiveness on the break above the $1,333.50 threshold, but this scenario looks unlikely in the short-term.
Nathan Lambert, Head of Global FX Analytical Departament