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Trump and China cool down the trade war – calm before the storm?

September 02, 2019 15:30

Economic Events September 2 – 6, 2019

Source: Economic Events Calendar September 2 – 6, 2019 - Admiral Markets' Forex Calendar


DAX30 CFD

With the latest developments around the trade war between the US and China on August 23, after Jay Powell's speech in Jackson Hole and risk-off hitting the global financial markets when US president Trump asked whether Fed chairman Powell or Chinese prime minister Xi was the bigger enemy of the US, warned that he would retaliate to China (which he did after markets closed with announcing new tariffs on Chinese goods), and ordered US companies to find an alternative to China, making the outlook for the DAX30 CFD for the last week of trading very dark.

That changed shortly before European markets opened last week on Monday: the main reason was surely a comment from US President Trump at the G7 meeting, that China called over the weekend and started an attempt to get at a table with the US again, but which was not confirmed by the Chinese.

The result was a relief rally and stabilisation in Equities over the last week of trading and not only that: on Thursday news made rounds that China won't immediately respond to Trump's latest tariff hike and in addition to that China still discusses a next round of trade war talks in September.

As a result, the German index broke above 11,800/850 and saw a re-test of the psychological relevant region around 12,000 points.

Still, in our opinion, the DAX30 CFD finds itself with a bearish touch and could see another drop lower with an attempt to break below 11,250 points.

On the other hand, recapturing 12,000 points leaves the index with potential as high as 12,180/200 points:

Source: Admiral Markets MT5 with MT5SE Add-on DAX30 CFD Daily chart (between 24 May 2018 to 30 August 2019). Accessed: 30 August 2019 at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, meaning that after five years, it was up by 10.5%.

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US Dollar

The outlook for the US dollar hasn't significantly changed over the last week of trading, despite the escalation in the trade dispute between the US and China after the speech from Fed chairman Jay Powell at the symposium in Jackson Hole on the August 23.

From a technical perspective, the USD Index Future can still be considered neutral within its range between 95.00 and 98.00 points, even though we should carefully watch the attempt to break higher into the weekly close after the Euro started an attempt to break below 1.1000 into the weekly close.

What's particularly interesting is in our opinion that the USD initially traded back towards 98.00 points most likely due to the comment from US President Trump at the G7 meeting, that China called over the weekend and started an attempt to get at a table with the US again.

Even though China didn't confirm such a call, it resulted in market participants to see a dropping chance of an outright currency market intervention from the US or at least a statement from the US Secretary of the Treasury Mnuchin, saying that the US no longer has a strong US dollar policy.

Still, we remain very cautious in regards to US dollar Long-engagements, especially after the latest developments last Friday. With the drop lower in the Euro (and thus attempt of the USD Index Future to break higher), first tweets of Trump addressing the Euro and Fed again, made rounds.

That said, in our opinion, the higher the US dollar rises in the current market environment, the more likely a tweet from US president Trump becomes probably ending with a note like "Then I'll take care of bringing the US dollar myself!", pointing to exactly such an outright FX market intervention and resulting in a massive US dollar Sell-Off.

But this remains highly speculative, at least for now.

If a sustainable break above 98.00 happens, further gains up to 100.00 points in the USD Index Future become an option:

Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between May 2016 to August 2019). Accessed: 30 August 2019 at 10:00 PM GMT

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Euro

While the complete escalation of the trade dispute between the US and China is dominating the news headlines around the world, Euro presented itself in a quite unspectacular mode, at least till Friday when EUR/USD dropped below 1.1000 for the first time since July 2017.

The drop is especially interesting after ECB Governing Council member Klass Knot said in a Bloomberg interview that the ECB does not need to resume the QE program at its September meeting.

After the remarks from Finnish ECB member Olli Rehn, who said in an interview with the Wallstreet Journal on August 15, that "it is important that we (the ECB) come up with a significant and impactful policy package in September", it seems in our opinion that the ECB is more and more likely to come out with a very big monetary stimulus package.

Our thinking: such comments as those from Knot only aim to help the ECB to get the biggest bang for their buck or to put it differently: the ECB tries to get the Euro as strong under selling pressure as possible at her September meeting with the target to counter any negative trade impacts and recessive tendencies, especially in regards to Germany.

On the other hand: we still see Short engagements in EUR/USD with a grain of salt, reason: the still given speculation of an outright currency market intervention from the US could see the Euro, due to the given bearish sentiment in the currency, pop sharply higher.

With that in mind, the break below 1.1000 into the last weekly close needs to see a clear confirmation. If such a confirmation is given, a first target in EUR/USD can be found around 1.0750:

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between 09 July 2018 to 30 August 2019). Accessed: 30 August 2019 at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the EUR/USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, meaning that after five years, it was down by 16.5%.


JPY

With the latest developments around the trade war between the US and China on August 23, after Jay Powell's speech in Jackson Hole and risk-off hitting the global financial markets when US president Trump asked whether Fed chairman Powell or Chinese prime minister Xi is the bigger enemy of the US, warned that he would retaliate to China (which he did after markets closed with announcing new tariffs on Chinese goods), and ordered US companies to find an alternative to China, JPY became one of the strongest performing currencies into the last weekly close.

After the currency pair opened last Monday below 105.00 and shortly traded at its lowest levels since November 2016, JPY gave back some of its gains while financial markets stabilised a bit.

One major reason was surely a comment from US President Trump who said at the G7 meeting on Monday, that China called over the weekend and started an attempt to get at a table with the US again which was not confirmed by the Chinese.

With rising scepticism that Trump probably "reinvented the truth" here a little and USDJPY still trading below 106.80/107.00, the advantage stays clearly on the short-side in the days to come with uncertainty remaining high among market participants.

In general, USD/JPY traders should remain cautious and expect potential volatility, not only because of an all in all packed economic calendar (ISM Manufacturing (Mo), ISM Non-Manufacturing, ADP (Wed), NFPs (Fri), but also with the still existing speculation of an outright currency market intervention from the US.

That said, a rather sooner than later attack of the region around 105.00 and sustainable break lower should definitely be expected in USD/JPY, while only recapturing 106.80/107 will brighten the technical picture a little:

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between 01 June 2018 to 30 August 2019). Accessed: 30 August 2019 at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of USD/JPY increased by 13.7%, in 2015, it increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, meaning that after five years, it was up by 4.1%.


Gold

In general, the picture in Gold stays clearly bullish after the complete escalation of the trade dispute on August 23.

After the retaliation of China which was answered by Trump after markets closed on Friday with announcing new tariffs on Chinese goods and the growing expectation of an outright currency market intervention announced by Trump to devalue the US Dollar are clearly risk-off-drivers and thus bullish for Gold.

Even after Trump tried to take out the heat of the trade dispute at the G7 meeting last Monday, saying that China called over the weekend and starting an attempt to get at a table with the US again which was not confirmed by the Chinese and on Thursday news made rounds that China won't immediately respond to Trump's latest tariff hike and in addition to that China still discusses a next round of trade war talks in September, one thing became more and more certain: uncertainty in financial markets remains elevated and will so in the weeks and months to come.

In addition to elevated uncertainty, the economic calendar is also quite packed in the days to come. And every print which disappoints, leaving the US dollar and US yields vulnerable to a drop lower, is potentially a driver higher for Gold.

In general, the mode stays short-term bullish (Hourly chart) above 1,492 USD, a little longer-term (Daily chart) above 1,380 USD with an overall potential target around 1,650/700 USD in the weeks to come:

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between 01 June 2018 to 30 August 2019). Accessed: 30 August 2019 at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of Gold fell by 1.7%, in 2015, it fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, meaning that after five years, it was up by 6.4%.


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