“Come the day and come the hour”. Unfortunately for Trump there appears to be no glory to be had from his bullish trade war tactic. Trump’s policy on building walls around the US appears to be catching up with him. Yesterday, Mexico hit back by imposing tariffs of their own on the US to the value of $3bln. The situation could further escalate for the US with European Commissioner for Trade, Cecilia Malmstrom, stating the EU was reaching out to countries like Canada, Mexico and Japan to forge a united front. Further talk of an alliance here could spell real trouble for the US economy, where exports in April fell $700mln. The dollar is off from where we were yesterday morning, trading back above the resistance level at 1.1750. We would need to see a real break above this support if we are to see a move higher to 1.1830. GBPUSD also gained ground since yesterday, edging higher since breaking 1.34 this morning.
In Europe where Italy’s new Prime Minister Guiseppe Conte laid out his plan to eliminate the gap growth between Italy and the EU, while keeping the country’s debt in check. Investors didn’t seem convinced with the Italian bond yields rising, with the 2 and 10 year yields both up 25 bps on the day. In Spain, we also have incoming PM Pedro Sanchez due to introduce his cabinet later today, we’ll be keeping one eye on how yields react to gage the markets mood on this. This sets us up nicely for next week’s ECB policy meeting where ECB chief economist Peter Praet confirmed the meeting will be pivotal for reaching a decision on when to end their bond buying program. Euro could find itself trading very cautiously up to the event.
In the UK, the services sector reached three month highs with the Services PMI indexing rising from 52.8 in April to 54.0 in May. One key finding from the survey was that uncertainty relating to Brexit was still one of the main factors in making decisions. We touched on the notion of higher inflation yesterday in the UK going forward with the introduction of new taxes and oil prices rising, will this see inflation overshoot the BoE’s target and will a rate hike by the end of the year become more prominent? The way the pound is trading it may be holding back a little, most likely because of the tension over the upcoming vote on the Brexit bill amendments due to be debated in Parliament next week.