Tariffs? – So what!

China responded to the latest US tariffs with tariffs of their own of between 5-10% on $60 billion worth of American imports. Looking at markets, you’d think nothing had happened!

 

Dow at eight-month high

After an early wobble, the index powered 0.7% higher to close at its highest level since January, helped by gains in some counters that had been previously negatively affected by earlier tariffs. The S&P500 failed to hit a new record high above last month’s peak while the Nasdaq held a healthy bounce of the 55-day moving average. The US dollar, measured against a basket of six currencies, rose 0.15% as US 10-year yields climbed to their highest since May.

 

 

Across Asian equity markets, sentiment was not quite so bullish, though most indices did trade in the black. The Nikkei edged a 0.03% gain while China shares rose 0.77% while the Hang Seng gained 0.68% by lunchtime. The US dollar maintained its bid bias with USD/JPY hitting its highest in two months as US yields held their higher levels.

 

S&P sees greater impact for US

On the latest tariffs, ratings agency S&P commented that it saw that the aggregate impact of both tariff and confidence effects would be more pronounced on the US economy than China’s. A full-blown trade war, with tariffs of 25% on all non-fuel goods, is seen shaving 1.2% off the US’ GDP over 2019-2021 with the loss for China about 1%. Their major concern is that China may start responding with non-tariff actions, once tariff possibilities are exhausted.

Possibly in a hint of things to come, recent data released by the US Treasury Department showed that China’s holdings of US Treasuries fell to a six-month low of $1.17 trillion in July, down from $1.18 trillion in June. While some say the selling may have been to fund USD/yuan sales to support the local currency, others fear it may be a partly in response to the US imposing tariffs on Chinese goods.

China Holdings of US Treasuries

Source: US Treasury Department; Oanda

 

 

Bank of Japan: No talk, no action

The Bank of Japan left its benchmark interest rate unchanged at 0.10%, as expected. It also maintained its 10-year JGB yield curve control at about 0%, also as had been expected. The vote on yield curve control was 7-2, with members Harada and Kataoka dissenting. The central bank also maintained its annual pace of JGB holdings at 80 trillion yen and annual ETF purchases at six trillion yen. Given the non-event style of the decision, USD/JPY barely moved afterwards, stuck at 112.36 and holding close to its two-month high.

 

 

Pound lifted by May’s Brexit chatter

On the eve of an EU summit in Austria, UK PM Theresa May spoke with the UK’s Express newspaper saying the withdrawal agreement is virtually agreed and would be the right plan for the UK and deliver a good deal for the EU. She also warned that calls for a second referendum risks shattering trust in the government. Talking about the rumored plot against her leadership from within her own party, she insisted she plans to stay in Downing Street to deliver a program to transform Britain long after next year’s Brexit deadline.

 

GBP/USD Daily Chart

Source: Oanda fxTrade

 

GBP/USD touched an eight-week high of 1.3176 early in today’s session and is testing the 100-day moving average at 1.3165. The pair has not closed above this moving average since April 26. GBP/USD is currently sitting at 1.3155.

 

UK prices in the spotlight

We get to see the whole range of UK price indices for August today. Producer output prices are expected to rise 0.2% from July, while consumer prices are seen jumping more, with a 0.5% increase over the previous month. Retail prices are also expected to rise from July, with a 0.6% gain forecast. Euro-zone construction output for July completes the European session. The only US data today are housing starts and building permits for August, along with the Q2 current account balance. That is expected to show an improvement in the deficit to $103.5 billion from $124.1 billion. The day is rounded off with a late speech by ECB’s Draghi.

 

The full MarketPulse data calendar can be viewed at https://www.marketpulse.com/economic-events/

 

Source: MarketPulse

GBP/USD – Pound Ticks Lower, Investors Eye British CPI

The British pound has posted small losses in the Monday session. In North American trade, GBP/USD is trading at 1.3809, down 0.14% on the day. On the release front, there are no British data releases on the schedule. The US federal budget is expected to rebound and show a large surplus of $50.2 billion. The last time the federal government posted a surplus was in September. On Tuesday, the UK releases a host of inflation indicators, led by CPI.

It was the Bank of England’s turn to be in the spotlight on Thursday. The BoE made no changes to interest rates or quantitative easing, and both moves were unanimous (9-0). There was some surprise however, at the hawkish tone of policymakers, who said that interest rates could rise “earlier” and by a “somewhat greater extent” than they predicted at their previous meeting in November. Bottom line? We could see an interest rate in the first half of 2018, with analysts circling May as the most likely date. At the same time, the effect that Brexit is having on the economy is difficult to predict, and if the economic conditions worsen, the BoE could delay a rate hike. The hawkish message from the BoE pushed the British pound above the 1.40 level, but the upward swing didn’t last, as the pound had to settle for small gains on Thursday.

It’s a quiet start to the week in the US, and the US dollar has been generally subdued. That will likely change on Wednesday, with the release of inflation and retail sales reports. The markets will be glued to the inflation indicators, as last week’s stock market slide was triggered by concern that higher inflation would lead to additional rate hikes from the Federal Reserve and other central banks. If inflation numbers are higher than expected, we could see some volatility from the US dollar as well as the stock markets.

GBP/USD Fundamentals

Monday (February 12)

  • 4:50 MPC Member Gertjan Vlieghe Speaks
  • 11:30 MPC Member McCafferty Speaks
  • 14:00 US Federal Budget Balance. Estimate 50.2B

Tuesday (February 13)

  • 4:30 British CPI. Estimate 2.9%

*All release times are GMT

*Key events are in bold

 

GBP/USD for Monday, February 12, 2018

GBP/USD February 12 at 11:30 EDT

Open: 1.3828 High: 1.3876 Low: 1.3796 Close: 1.3809

 

GBP/USD Technical

S1 S2 S1 R1 R2 R3
1.3613 1.3744 1.3809 1.3901 1.4010 1.4128

GBP/USD posted gains in the Asian session but gave these up in European trade. The pair is steady in North American trade

  • 1.3809 was tested earlier in support and is under strong pressure. It could break in the North American session
  • 1.3901 has some breathing room in resistance following losses by GBP/USD on Friday

Current range: 1.3809 to 1.3901

Further levels in both directions:

  • Below: 1.3809, 1.3744, 1.3613
  • Above: 1.3901, 1.4010, 1.4128 and 1.4271

OANDA’s Open Positions Ratio

In the Monday session, GBP/USD ratio is showing short positions with a majority (56%). This is indicative of trader bias towards GBP/USD continuing to lose ground.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.