USD USD USD

US tariffs back in focus this week?

Forex
John J. Hardy

Chief Macro Strategist

This week looks set to provide markets with an update on the trade war theme as President Trump’s proposed tariffs face extensive discussion in the US. Elsewhere, the general status of the USD rally will be in focus as the EURUSD bounce nears 1.2000.

The latter half of last week saw the USD weaker and risk appetite continuing to improve, perhaps as the lid was kept firmly on US yields after a small negative surprise on the US April CPI data and after a trio of Treasury auctions that included a solid 10-year and 30-year result. Geopolitical drama was shrugged off as nearly always, including the increasingly hot confrontation between Israel and Iran on Syrian soil after the US dropped its commitment to the Iran nuclear deal.

In Italy, it appears that the two populist parties will cobble together a ruling coalition that the market somehow sees as putting zero existential strain on the single currency. Italian to German 10-year yield spreads, while much wider than those for Spain-Germany (around 132 basis points for the former versus 72 bps for the latter). Apparently, optimists believe either that the coalition will be mostly derailed in implementing anything dramatic by their lack of synergy or by political reality, but for the longer haul, this is a dangerous assumption. Italy’s debt trajectory is entirely unsustainable and the most interesting idea from either of the two parties in power is the Lega’s interest in studying ways to issue new bonds (so-called “mini-BOTs”) that are backed by tax revenue and would effectively act as a kind of parallel currency – something that is entirely outside of the EU legal framework.

Regardless of the specific trigger, the next recession in Italy guarantees some sort of showdown with the EU with these two parties in power.

The focus this week looks rather diffuse, with lots of action on the economic calendar but few standout event risks. Among these are the three days of hearings scheduled from Tuesday to Thursday in the US at the trade representative’s office on threatened tariffs. the clock is winding down on whether these will be implemented and the “trade war” theme could quickly re-emerge. Otherwise, we have a number of Fed and ECB speakers out all week jawboning as one of the most relevant macro indicators – the flattening of the US yield curve – continues to grind away as long as a) short rates remain  elevated and the Fed continues to hike rates and b) the longer end fails to break through the 3.00% resistance level for the 10-year benchmark. 

Finally, we are awed that the major equity indices have managed to claw to local highs despite the strong growth headwinds from higher oil prices, the geopolitical noise, etc cetera. Current levels don’t look likely to last as we are either set for a rapid extension higher or a rejection of the recent break.

Chart: EURUSD

EURUSD is a reasonable proxy for the status of the USD rally as the pair found support mid-last week below 1.1850 and could eye the 1.2000 big round level or possibly the 200-day moving average for local resistance levels, but bulls can’t really take heart until the pair has worked back above the pivot zone on the way down at around the 1.2200 level. This sell-off has been sufficiently deep to throw the entire chart into neutral in the bigger picture until the bulls prove themselves.

EURUSD

The G-10 rundown

USD – if the dollar rally is to make a stand, it will need to do so by the end of this week. Not sure we will see anything on the data front, rather preferring to focus on Fed speakers, trade headlines, US Treasury, yields and risk appetite.

EUR – plenty of ECB speakers out this week, including Draghi out on Wednesday, though expectations have gone largely flat some time ago for ECB policy. Data-wise, interested in the German ZEW survey expectations component, which has soured badly over the last couple of months and has proven a solid leading indicator in prior cycles.

JPY – high oil prices are JPY-negative, and USDJPY has consolidated far more lightly than other USD pairs since last Wednesday. The trigger area in USDJPY remains the 110.00 level after it was probed twice over the last two weeks, with the combination of higher US yields and higher oil prices without a spike in equity volatility offering the most potent support for a new rally extension.

GBP – sterling is in the doghouse after the Bank of England meeting last Thursday and softened the language in its statement on the potential for future rate hikes while also downgrading the 2018 growth forecast. Still, is there enough to drive EURGBP out of the range to the upside? In GBPUSD, the 1.3500 area is the last life support for that pair and the consolidation there has entirely lacked bounce.

CHF – USDCHF consolidating lightly after a run all the way above parity recently. EURCHF has recovered after a brief meltdown through 1.1900, perhaps as the market has decided that Italian politics don’t offer any EU existential threat just yet.

AUD – a sharp bounce in the Aussie after a rather brutal slide. The next resistance zone is into 0.7600-50 without threatening the downtrend. Australia employment data up on Thursday.

CAD – interesting data from Canada toward the end of the week. Last week’s peak just ahead of 1.3000 underlines that level as the key barrier for further upside potential as the chart is a structural mess. More downside interest picks up if 1.2650 fails, though the bigger trigger area lower is 1.2500.

NZD – the fallout from the dovish RBNZ surprise last week continuing and AUDNZD  is interacting with the pivotal 1.0800-50 area that could open up the higher range all the way to 1.1300.

SEK – a very chunky consolidation in EURSEK, mostly driven by positioning, it seems, as the underlying rate expectations adjustments have been rather modest. The EURSEK move may run out of steam here around 10.20-25 without new SEK-positive catalysts.

NOK – EURNOK teasing lower into the final range support just below 9.50 – that’s the area that unleashes trend potential toward 9.25.

Upcoming Economic Calendar Highlights (all times GMT)

   • 0730 – Sweden Apr. Average House Prices
   • 1000 – ECB’s Mersch to Speak
   • 1015 – ECB’s Lautenschlaeger to Speak
   • 1145 – ECB’s Praet to Speak
   • 2310 – Australia RBA’s Debelle to Speak
   • 0130 – Australia RBA Meeting Minutes

 

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992