The trade rhetoric between US and China dominates trading on Tuesday, with Trump threatens new 10% tariffs on $200 billion of Chinese goods. The decision raised fears of a potential trade war between the two countries and fuelled risk aversion across the global financial markets. China in turn urged US to stop deeds that will hurt others and itself. The country also reiterated that it does not want a trade war, but is not afraid of one. Meanwhile, the rising uncertainty ahead of the OPEC summit this week adds fuel to the fire. Therefore, after a steep decline in Asia, European stocks keep bleeding amid the risk-off environment. As such, Britain’s FTSE 100 sheds 0.55 per cent to 7,588, France’s CAC 40 loses 1.38 per cent to 5,375, while German DAX 30 drops by 1.62 per cent to 12,626. US stock index futures slumped before the opening bell as well.
The dollar demand surged in Europe, with the European currencies dropped significantly today. The EURUSD pair has received the intermediate support around 1.1530, but the 1.15 level remains under threat as the combination of strong dollar and the dovish ECB tone coupled with risk aversion represents a strong bearish driver for the single currency. The ECB officials confirmed today that the rates will remain on hold at least till Q3 2019, with Liikanen highlighted that the central bank can hold rates even after summer 2019 if needed. Draghi also sounded quite pessimistic and cautious. So, the monetary policy divergence remains a major downside factor for the euro, on top of rising dollar amid trade tensions. From the technical perspective, the EURUSD pair needs to keep above late-May lows just above the 1.15 figure in order to avoid even steeper losses. In the short term, the potential recovery attempts will likely be shallow and short-lived.
The pound has also suffered from the resurgent USD demand, with GBPUSD dipped to mid-November lows in the 1.3150 area. The additional pressure on the pair comes from the lingering Brexit uncertainty as the key issues remain unresolved. In particular, the House of Commons has another vote tomorrow, and today Theresa May indicated that the UK government will not accept the amendment from the parliament proposal on the meaningful vote on the Brexit deal. So the dispute between the domestic lawmakers and the prime minister is getting even hotter, which further undermines the pound, in addition to the sell-off amid the risk-off environment. Therefore, despite the pair looks oversold already, it may be too early to call a bottom at this stage as the pressure on high-yielding currencies may yet intensify. The fact that the pair has been trading below the 20-DMA for the last few days also adds to the bearish picture for the sterling.
USDJPY has trimmed earlier losses amid the rising dollar demand across the board. The pair found a local bottom around 109.50 and tries to get back above the 110.00 figure during the European hours. The immediate downside pressure is still there, but the recent decline could be a good buying opportunity as the greenback remains firmly within the uptrend. So as soon as the risk-off sentiment changes, the price could resume the ascent with the key target at 111.00. A break above this level is needed to confirm the rally and the rise above the 111.40 area, where the May 21 high lies. In the short term, the pair will likely continue to oscillate around 110.00.
Brent struggles for direction on Tuesday amid conflicting signals from OPEC members. Russia’s Novak said he plans to propose discussing increasing oil output by 1.5 million bpd, citing the rising demand and the balancing market. The Russian minister said that Q3 is good time for a test as there is highest demand for oil during that time. Meanwhile, Iran, Algeria and Venezuela oppose the immediate output increase, while the OPEC technical panel is reported to believe that the market could absorb extra production due to strong demand. At this stage, it is obvious that the upcoming OPEC meeting will be the hottest in years, and a number of different scenarios are on the cards. So, the crude oil market will remain volatile in the coming days, with the downside risks still persist. In the short term, Brent will likely fail to get back firmly above the $75 level due to high level of uncertainty in the industry.
Nathan Lambert, Head of Global FX Analytical Department