European stocks edged lower on Monday, but trimmed losses afterwards as investors mostly shrugged off the new trade tariff threat. Washington reported it set to announce a new round of tariffs on Chinese goods, which spooked Chinese investors and makes European markets trade in a cautious tone. As such, Britain’s FTSE 100 sheds 0.21 per cent to 7,289, France’s CAC 40 is flat at 5,352, while German DAX 30 declines by 0.32 per cent to 12,086. US stock index futures inch lower in early pre-market trade as US-China trade fears are back in market focus.
The currency markets however don’t reflect the worsening risk sentiment so far. The greenback is under pressure, trimming gains from Friday, when the buck rallied across the board on strong US consumer confidence and industrial production data. EURUSD has resumed the ascent from lows above 1.16, but lacks the impetus to challenge the 1.17 threshold. The monthly Bundesbank report came on a positive side, with the German central bank highlighted that went through a temporary period of weakness and the economic growth in Germany remains fundamentally intact. Meanwhile, the ECB’s Vasiliauskas said that there is no reason to talk about extension of stimulus. As such, the euro could proceed with the current rise in the short term, but bearish risks persist as the tariff threat is still there. As such, the pair may try to regain the 1.17 level, but it will hardly be able to show a firm break above this figure as dollar will likely remain supported by trade jitters.
GBPUSD has resumed the upside move on Monday after a brief correction from six-week highs late last week. The pair is back above 1.31, which points to a bullish technical picture in the short term. Sterling is rising despite the lack of progress on Brexit. Moreover, the rhetoric seems to be heating as the UK Prime Minister Theresa May said it is either her deal or no deal Brexit, while the EU is preparing a new protocol for Irish border. In this context, the pound still risks to resume the decline as the lingering Brexit issues coupled with the potential new wave of risk aversion on US-China tariffs may sent sterling south, especially considering the pair is trading at attractive levels for profit-taking.
USDJPY is making tepid bullish attempts, but the greenback obviously lacks the impetus due to some yen demand amid a slight risk aversion which could intensify at any moment and drive the pair down. As such, the potential for a firm break above the 112.00 figure is rather limited at this stage, and the 112.15 level remains the immediate resistance for the dollar. The US empire manufacturing index came in weaker than expected at 19 versus 23.0 expected, but the general picture showed that the business activity continued to grow at a solid pace. Anyway, the release has added to the bearish pressure on the dollar, and the pair needs to hold above the mentioned 112.00 threshold to avoid a more aggressive selling pressure in the short term.
Brent crude is rising marginally, but lacks the directional impetus after an aggressive bearish correction late last week. The price struggles to stay above the $78 figure as the market is moving amid the counteracting factors. The prices continue to be supported by the evidence of Iranian oil exports decline ahead of US sanctions, while the upside potential is capped by trade worries as the tariffs exchange between the US and China risk to derail global oil demand down the road. Technically, Brent looks exposed to the downside as the current recovery attempts fail to attract a more robust buying pressure. The market looks vulnerable to further losses as Trump’s fresh tariffs are coming. Therefore, the bulls will likely be cautious at this stage as the risk sentiment could get worse in the short term. The immediate downside target for Brent now comes at $77.50.
Nathan Lambert, Head of Global FX Analytical Department