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Trump escalates trade war further – direct currency intervention to bring the USD down an option?

August 26, 2019 16:00

Economic Events July 26 – August 30, 2019

Source: Economic Events Calendar August 26 – 30, 2019 - Admiral Markets' Forex Calendar


DAX30 CFD

In our last weekly market outlook we pointed out that the technical picture in the DAX30 CFD darkened significantly with the drop below the SMA(200) on a daily time-frame.

Until Friday, it looked as if the tide could turn with the German index eyeing 11,850 points again.

That changed after the trade war escalated to a new level on Friday: after China announced to retaliate to the latest tariff announcement by US president Trump by slapping 10% tariffs on 75 Billion USD in US imports, Fed chairman Powell could at his speech at Jackson Hole stabilise the markets and thus the DAX30 CFD, leaving the German index in striking distance to the significant zone of resistance.

But shortly after, "hell broke loose" when US president Trump asked whether Fed chairman Powell or Chinese prime minister Xi is the bigger enemy of the US, and 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.

The DAX30 CFD sold off sharply, now eyeing 11,250 points again. A break below would activate 11,000 as a first, psychological target with a target below around 10,800:

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between May 16, 2018, to August 23, 2019). Accessed: August 23, 2019, at 10:00pm 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

Starting Friday, and even after the speech from Fed chairman Powell at the symposium at Jackson Hole last Friday, the performance in the US dollar has been fairly unspectacular.

But this changed after the deluge of tweets from US president Trump, which brought the escalation in the trade dispute between the US and China to a new level.

The retaliation of China was answered by Trump after markets closed on Friday, by announcing new tariffs on Chinese goods and the growing expectation of an outright currency market intervention announced by Trump to devalue the US dollar, will be likely a driver for the price action in the Greenback in the days to come.

Still, from a technical perspective, the USD Index Future should be considered neutral within its range between 95.00 and 98.00 points where a break on the downside and below 95.00 would become very likely if we get to see an outright currency market intervention, but probably also if US Secretary of the Treasury Mnuchin and say that US no longer has a strong US dollar policy.

Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between May 2016 to August 2019). Accessed: August 23, 2019, at 10:00 PM GMT

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Euro

The outlook for the Euro hasn't significantly changed over the last week of trading from a technical perspective, as the currency pair is still trading above 1.1000, but below 1.1300, leaving it in a neutral state, but with a clear bearish touch.

Still, the latest developments on Friday with the complete escalation in the trade dispute between the US and China, especially from US president Trump, leave the Euro with a bullish touch, especially in front of the ECB rate decision being still more than two weeks away.

If speculation of an outright currency market intervention from the US persists, the Euro could see some heavier buying with being considered at least a short-term attractive reserve currency, levelling the path up to 1.1300 and probably even above that level.

Still, traders should be careful of a too-bullish expectation for the Euro since 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", chances are still very high that significant monetary stimulus from the ECB will be delivered in one or the other way, leaving the Euro vulnerable to a drop on a broad front, against the US dollar below 1.1000:

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between June 15, 2018, to August 23, 2019). Accessed: August 23, 2019, at 10:00pm 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%.


AUD/JPY

With the Friday's developments, and a risk-off hitting the global financial markets after US president Trump asked whether Fed chairman Powell or Chinese prime minister Xi is the bigger enemy of the US, he then warned that he would retaliate to China (which he did after markets closed with announcing new tariffs on Chinese goods) and proceeded to 'order' US companies to find an alternative to China, JPY became one of the strongest performing currencies into the weekly close.

And with the rising speculation of an outright currency market intervention from the US, an attack of the region around 105.00, sooner rather than later, should definitely be expected in USD/JPY.

What USD/JPY traders should be nevertheless careful about is any signs of the BoJ stepping up and joining the currency war, especially by saving the Japanese economy which would definitely be hit by too strong JPY.

In AUD/JPY we remain bearish on a daily time-frame below 76.00/20 with seeing a potential short-trigger around 74.00/20 and another chance for a stint as low as the psychological relevant level around 70.00:

Source: Admiral Markets MT5 with MT5-SE Add-on AUD/JPY Daily chart (between May 31, 2018, to August 23, 2019). Accessed: August 23, 2019, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the AUD/JPY increased by 4.1%, in 2015, it decreased by 10.4%, in 2016, it decreased by 3.5%, in 2017, it increased by 4.0%, in 2018, it decreased by 12.1%, meaning that after five years, it was down by 17.7%.


Gold

The picture in Gold stays clearly bullish after the sudden escalation of the trade war between the US and China last Friday.

China's retaliation was answered by Trump after markets closed on Friday, by 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.

As a result, our bullish outlook for the precious metals remains intact with seeing our midterm target on the upside around 1,650/700 USD and Gold being technically bullish on a daily time-frame as long as we trade above 1,380 USD.

In addition to the overall advantageous environment in which Gold finds itself currently, we'd also like to emphasize the bullish seasonality of the precious metal until September 5:

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between May 25, 2018, to August 23, 2019). Accessed: August 23, 2019, at 10:00pm 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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