A fresh wave of risk aversion swept across financial markets after the United States threatened to impose tariffs on an extra $200 billion worth of Chinese goods.
This unfavourable move comes just days after the two countries slapped tit-for-tat tariffs on $34 billion worth of each other’s imports. With Beijing describing the latest tariff threats as “totally unacceptable” and vowing to fight back, concerns are likely to heighten over a full-scale trade war becoming a reality.
With escalating trade tensions between the world’s two largest economies presenting a significant threat to global economic growth and stability, there are no winners. Investors are likely to maintain a cautious stance for the rest of the trading week with global sentiment expected to remain fragile.
This cautious tone is already reflected in global equity markets this morning with Asian and European stocks tumbling lower. Wall Street could be poised to open lower this afternoon as the risk-off sentiment encourages investors to offload riskier assets for safe-haven investments.
Dollar index stabilizes above 94.00
The dollar was steady against a basket of major currencies on Wednesday morning with prices trading marginally above 94.20 as of writing.
With the fundamental drivers behind the dollar’s appreciation still firmly intact, there is a suspicion that the post-NFP sell-off was based on profit taking.
Market expectations over the Federal Reserve raising interest rates at least two more times this year are seen as continuing to heavily support the dollar. With investors potentially rushing to the dollar as a source of safety amid escalating trade tensions, further upside could be witnessed in the near term.
Focusing on the technical picture, the dollar Index has scope to resume the uptrend if bulls are able to conquer 94.50. A decisive daily close above this level may encourage an incline towards 95.00.
Currency spotlight – EURUSD
The divergence in monetary policies between the United States and Europe has left the EURUSD fundamentally bearish.
While expectations remain elevated over the Federal Reserve raising rates two more times this year, the European Central Bank is expected to retain the zero-interest rate policy (ZIRP) until after Summer 2019.
With regards to the technical picture, the EURUSD continues to fulfil the prerequisites of a bearish trend on the daily charts. There have been consistently lower lows and lower highs. A solid daily close below 1.1690 could trigger a decline towards 1.1630 and 1.1550, respectively. Daily bears remain in control as long as prices remain below 1.1850.