Market News & Insights
21 May 2018

Trade Talks Stoke Dollar Demand

Demand for the USD continues to pick up and just this morning we have seen EURUSD break to fresh five months lows while GBPUSD has also been under pressure dropping back to just above 1.3400 while USDJPY now trades back above 113.00. The USD index is now up over 6.5% from its February lows. Much of the surge higher to welcome in the week comes as progress between US and China trade talks means the prospect of any trade war is now on hold, the US will see a pickup in trade with China with the aim for China to increase its purchase for goods and services from the US. The US now planning to send a team to China to work out the details of increased trade. But for now the USD remains well in demand and with several key technical levels broke, the USD now looks set to continue its advance for a little longer. There are a couple of Fed speakers due later today, but we’re not expecting anything too hard hitting on the data front until Wednesday when we get the minutes released of the latest FOMC meeting. In the interim we’ll be keeping an eye on US/China trade talks, discussion on NAFTA and of course any increase in geopolitical tensions.

It’s been a poor couple of weeks for the EUR. EURUSD is down over 6.6% from the year’s highs and we could well see the pair drop as low as 1.1550/1.1600 area. EURGBP is down just over 3% in the same time frame so there has been some euro weakness in play. The ECB’s Wiedmann had some comments over the weekend saying the ECB should announce an end date for QE and see inflation at 1.7% in 2020 in line with the ECB mandate. The “golden” level for inflation has always been around the 2% mark but despite over 5 years of continuous ECB easing the region is still struggling for any meaningful advance in price growth. We are very light on data from the Eurozone and we’ll likely have to wait until Wednesday before we get anything of note on the fundamental side. Markets will be keeping a very close eye on Greece and Italy as debt concerns begin to rear their ugly heads once more.

The pound is under pressure as well this morning and while there has been no great shift or change, the lack of any clarity on Brexit continues to weigh. I’m pretty sick of even writing that sentence but there’s no getting away from the fact that we are without any clear strategy on how the UK will transition away from the EU and set up new trading relationships. It’s been a long and frustrating journey already to this point and to still find ourselves looking around asking “what next” makes the whole scenario even more frustrating. We have a number of BOE speaker’s tomorrow morning and CPI data due for release on Wednesday. Should these prove to be supportive of UK growth the pound might have some chance of a rally but for now it’s struggling.

EURUSD looks supported at 1.1715/50 area for now, below that 1.1560/1.1630 area should prove a spot where the drop holds up and I’d expect to see EURUSD consolidate there. Any rally higher should fall short of resistance around 1.1830. EURGBP back in a familiar range, .8700 up to .8780, with .8830/50 above that the big line in the same for the pair moving higher. GBPUSD just broke out of two weeks of consolidation to the downside and we may well see additional declines towards 1.3300 from here, rallies higher should be held at ahead of 1.3600 in the near term.