European markets are trading in a subdued manner on Wednesday as fears of escalation in the US-China trade war reemerged after Trump said he could impose additional tariffs on Chinese goods. Meanwhile, British inflation matched the Bank of England’s 2% target for the second consecutive month, the Eurozone’s headline CPI was revised higher to 1.3% y/y in June, and core CPI was unchanged from the initial print at 1.1%. Anyway, the data is unlikely to alter the ECB's thinking and fresh stimulus may come soon. Besides, ECB member Benoît Coeuré said the bank was ready to act if needed to help inflation move towards its target.
Against this backdrop, the UK’s FTSE 100 sheds 0.20 per cent to 7562, Italy’s FTSE MIB loses just 0.01 per cent to 22,201, France’s CAC 40 is flat at 5,614, while German DAX 30 gains 0.02 per cent to 12,433. US stock index futures point to a higher open ahead of a slew of corporate results from Bank of America, Morgan Stanley, IBM and Netflix.
The dollar saw an impressive rally on Tuesday as traders cheered strong retail sales data, which further dampened prospects for aggressive stimulus by the Federal Reserve this year. Today, the US currency is stable, with demand has abated somehow. Nevertheless, the euro struggles to stage a robust recovery despite solid CPI numbers as traders are cautious amid growing fears of trade war escalation. By the way, it is reported that the US and China may have another trade call this week. As Wilbur Ross said, trade calls with China will determine if in-person meeting occurs. As such, EURUSD has settled marginally above the 1.12 handle and remains vulnerable to fresh losses.
GBPUSD continues to tumble and is trading at levels not seen since the start of the year. On the data front, The Office for National Statistics reported a 2% rise in the UK CPI in the year to June. This was as expected and unchanged from the prior reading. PPI input fell short in June declining 1.4% versus -0.1% expected. The pair dipped to fresh lows around 1.2380 earlier in the day and now struggles to regain the 1.24 figure. The main driver behind the latest sell-off was Brexit uncertainty which increased after UK PM candidates said that the Irish backstop is “dead”. It fueled concerns about a hard-Brexit and sent the pound tumbling across the board. Against this backdrop, the upside potential in the GBPUSD pair for now looks limited.
Meanwhile, Brent crude shifted to a recovery mode after yesterday’s plunge by over 3%. Futures climbed back to the $65 area as traders digested the signs of easing tensions between the US and Iran, as well as a bleak API report Crude inventories fell by 1.4 million barrels in the week to July 12 to 460 million barrels. By the way, if the official report due later today confirms a fall in inventories, it would be the fifth consecutive weekly decline, the longest stretch since the beginning of 2018. The prices are also regaining ground due to a waning dollar demand. Technically, Brent needs to get back above the 200-DMA in order to shrug off the recent selling pressure. On the downside, the immediate support coms around $64.30.
Nathan Lambert, Head of Global FX Analytical Department