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Tickmill UK Daily Market Notes


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[h=1]US Dollar waits for trade balance and GDP data to determine direction[/h] American stock indices struggled on Monday at historic peaks, the S&P 500 safely beat its own record approaching the 2900 mark. Monday’s rise is largely a result of Powell’s speech who noted that during the expansion of the economy there is no need to rush to raise rates. As an example, he cited the policy of Alan Greenspan in the 90s, which, contrary to market expectations of the return of high inflation, chose to wait for reliable signals about this before raising rates.

The US deal with Mexico under the NAFTA agreement and the expectation that Canada will soon join it allowed the markets to shyly bet on improving the state of affairs in world trade. The Australian and Asian markets reacted positively to the news.

Rumours that the US hastened the EU with the settlement of trade disputes also had a positive impact on the appetite for risk. On Monday, the White House reported that Trump and Merkel had telephone conversations in which both sides supported the need to remove trade barriers. European markets closed in positive territory on Monday.

Positive shifts in trade on the American continent have not yet been extrapolated to global trade, especially, US relations with China, since the nature of the claims to the Celestial Empire as a competitor in the high-tech sphere are somewhat different. Broad state support for enterprises, both financial and implicit regulatory, export subsidies, the relative closure of the domestic trading market, manipulation of the yuan, undermine, in the opinion of the US administration, the principles of free competition and fairness in trade. China is trying to fight back with the increase in purchases of hydrocarbons and some sensitive items of US exports, but so far, unsuccessfully.

The recent low-level talks between the representatives of the two countries, reached a deadlock and in a few hours after the end, additional tariffs were introduced for 16 billion dollars from both sides. The aggregate amount of goods that fell under the tariffs amounted to 100 billion dollars.

Now the US administration is in the process of developing new tariffs and news has already appeared that the US is going to introduce wheel rim tariffs, which, according to the US, are heavily subsidized (from 50% to 175%). The duties will be introduced in proportion to these subsidies.

The dollar index fell to the level of 94.60, but the cautious nature of the dollar’s decline against other major currencies indicates a correctional nature of the movement, rather than full-scale sell-off. Support from the Fed, as I noted in my previous article, will allow Trump to fight more confidently against China, so the new tariffs and the potential for a jump in inflation as a consequence, so far remains relevant as an upside risk to the dollar. The economic picture so far also indicates the preponderance of the dollar, because other world Central banks remain unsure of the need to tighten the policy, just because of the lack of strong signals from inflation and rising wages.
Data on the US trade balance for July, which will come out later today, will help evaluate the effectiveness of the protection policy of Trump. The previous two months, the trade surplus shrank, indicating either a decrease in imports or an increase in exports, or their combined effect. On Wednesday we expect data on US GDP for the second quarter, which will also affect the dynamics of the dollar. Data on personal consumption allow us to assess consumer inflation and the effect of income on consumption patterns. Demand for tomorrow’s auction of treasury 2-year and 7-year securities will allow us to look at the market’s reaction to the massive increase in public debt due to the financing of the tax reform.

The Turkish lira continues to slowly bear losses against the dollar, after a brief relief against the publication of measures to reduce the pressure of speculators on the lira, US tension and Turkey’s debt problems again come to the fore as risks for the Turkish currency. USDTRY topped 6.20 on Tuesday.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.


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