After Asia finished on a mixed note, the European stocks opened mostly higher on Tuesday, but show signs of exhaustion by mid-day. The European Commission President Jean-Claude Juncker expressed hope that the United States in the coming days will explain what the EU should do to avoid Trump’s tariffs. The non-hostile tone from Juncker added to a mildly positive tone in Europe, though investors remain cautious anyway, as the threat of a trade war is still present. By the way, a fresh example of this is Trump’s decision to block Singapore-based chip giant Broadcom’s bid for the American company Qualcomm. The president cited the fact that the takeover has a spy threat from the Chinese giant Huawei. This step may be a warning sign of further, even more aggressive US actions against China on trade. As a result, Germany’s DAX is down 0.33% to 12.374,76, French CAC 40 is trading 0.01% lower on the day, at 5.276,70, and Britain’s FTSE sheds 0.38% to 7.187,35. In another sign of the continuing personnel turnover in the US administration, Trump has just fired Secretary of State Rex Tillerson and decided to replace him with CIA Chief Mike Pompeo. This step took markets by surprise and made the US stock futures pair their gains immediately. Meanwhile, the greenback extended its decline on the news, erasing an earlier advance after the CPI report. As expected, February inflation increased 0.2 percent on a seasonally adjusted basis after rising 0.5 percent in January. Despite there were no surprises in the numbers, the market reacted negatively as the USD bulls hoped to see stronger results. Anyway, the report doesn’t contain any signs that could make the Fed adjust its current stance on tightening. The EURUSD pair turned positive after the release and extended gains following the news on Tillerson departure as the dollar soured across the board amid fresh signs of political instability in the White House. In this environment, the euro climbed back above the 20-DMA above the 1.2350 area and touched almost one-week highs at 1.2385. Amid the greenback’s bearishness, the pair may yet probe the next barrier at 1.24 in the short term.
GBPUSD shows similar dynamics, extending its three-day rally. The price jumped to 1.3970 on the CPI-Tillerson news, easily leaving behind the 20-DMA around 1.3925. The additional support for the pound came from the Spring Statement by Philip Hammond who said the government is making progress on improving economy. The UK Office for Budget Responsibility raised forecast for economic growth in 2018 to 1.5%, but lowered its longer-term GDP projections and reported that recent productivity growth pickup will soon be reversed, which made the pair pare its gains partially. Nevertheless, as long as the greenback is digesting another dose of negative news, the pound will remain in the positive territory.
USDJPY rallied to 107.30 before the CPI report and the news from Trump’s Twitter. Despite the widespread dollar beating, the pair remains in the “green” due to yen weakness on the back of a deepening “schoolgate” scandal involving the Japan’s prime-minister Shinzo Abe. The market participants fear these events may intervene in the internal political processes in the country, so this time the national currency can’t but react to the worsening situation. On the other hand, the USD fragility reduces chances for a sustained break above the 107.00 threshold, especially amid a threat of another risk aversion wave following fresh surprises from Trump.
The oil market shows rather neutral dynamics on Tuesday. The recent bearish slope has faded, and the asset now tries to settle in the positive territory. Brent is attempting to regain the $65 amid the dollar sell-off. But the ghost of shale revolution continues to scare bulls and prevent prices from returning to a sustained growth path. According to the Energy Information Administration projections, the shale output at major oil fields in the US will continue to rise further, which dented the timid recovery attempts in the market. Meanwhile, as long as Brent remains above the local $63.85 support, the downside risk is limited. Should the API numbers disappoint the bulls, the barrel may retreat from its current levels and close below $65 again.
Gold received a wild boost and quickly turned positive on the day amid renewed USD sales and fading risk-on sentiment following a fresh trick from Trump. Prices jumped aggressively from lows below the $1.314 mark to six-day highs above the $1.327 level. However, further upside potential looks limited as the US stocks will hardly get in a full-blown panic as investors have already got used to staff reshuffles in the Trump administration and may breathe a sigh of relief after the CPI numbers didn’t point to increasing chances for four rate hikes this year.
Nathan Lambert, Head of Global FX Analytical Departament