Dragging down the consumer

Today's news headlines:

‘US to put tariffs on Europe planes, whiskey after WTO ruling’ – The World Trade Organisation (WTO) has given the green light for President Trump to impose tariffs on European exports in retaliation for illegal EU aid to Airbus. The tariffs that come into effect on 18^th October 2019 include food and beverage goods such as cheese, Scotch whiskey and French wine, as well as civil aircraft from various European nations. (Bloomberg)
‘Brexit: Government to set out Boris Johnson’s deal to MPs’ – Boris Johnson’s government is expected to present to Parliament their Brexit deal proposal that was sent to the EU on Wednesday afternoon. Whilst opposition leaders were quick to dismiss Johnson’s plans, EU leaders are yet to respond. Johnson’s plan effectively keeps Northern Ireland in the European single market for goods but removes them from the customs union, meaning new customs checks will be required. (BBC)

Trade war takes flight

Until yesterday, the US had been locked in a 15-year dispute with French aviation manufacturer Airbus over claims they had received billions in illegal state aid, including trade-distorting subsidies for their A380 and A350WXM models. In the largest ruling in WTO history, the organisation gave President Trump the green light to impose tariffs on as much as $7.5 billion worth of European exports annually. Due to take effect on October 18^th, the tariffs will likely affect several European nations as the US looks to target speciality foods, luxury goods, aircraft and aircraft parts. Trump called the ruling a “big win” for America as countries had been “ripping off the United States for many years”. However, it’s thought that the tariffs will do more harm than good. In the first instance, prices of tariffed goods will probably rise, affecting domestic consumers and acting as a drag on the US economy. Airbus also warned that levies could hit US jobs, as 40% of Airbus parts are manufactured in the US. To exacerbate the issue, the WTO will soon rule on the countermeasures Europe can impose on the US over illegal aid to Boeing. This could lead to an outcome akin to the US/China situation, damaging relations between the two to everyone’s detriment.

With fears of an impending recession on the rise, a pointless battle between the US and Europe will result in greater uncertainty and deterioration of the already weak global growth forecast. This week, the WTO had cut its trade growth forecast to the slowest in a decade and we’ve seen markets move away from riskier assets as the volume of disappointing data mounts.

Bottom Line: We’ve seen further signs of slowdown in Tuesday’s manufacturing PMI data and this morning’s weaker than expected Eurozone services PMI figure – just off a 6-year low at 51.6 – will do little to reassure investors that the consumer remains insulated from the deterioration.

GBP/USD

Yesterday, Cable climbed above the 1.23 level having bottomed out at 1.2227 earlier in the day. Johnson’s speech and the release of his new Brexit proposal barely moved the pair but the upcoming responses from EU leaders may. The 50 daily moving average continues to support the pair but anything close below the level, currently at 1.2256, may trigger further downside movements.

GBP/EUR

The pair traded relatively flat yesterday with support at 1.1210 and failing to maintain above 1.1250. Today’s expected Brexit developments, as well as a host of European PMI data, may put pressure on the pair from both sides of the currency cross.

EUR/USD

This morning’s European PMI data could set the tone for EURUSD movements throughout the day, along with US non-manufacturing due this afternoon. The pair hit resistance at 1.0960 overnight and may test the level again in today’s session. Alternatively, strong US data combined with weak Euro data may trend the pair down towards Monday’s low of 1.0879.