New day, new threats

​​​​​Today's news headlines:

  • ‘Trump to impose tariff of up to 25% on Mexico over migrant surge’. A new cause of safe-haven demand emerges as the US President opens new trade conflict. Trump has threatened to gradually increase the levy until the issue of illegal immigration across the US-Mexico border is solved. (Bloomberg)
  • ‘China factory data miss raises expectations of policy support’. China’s most recent contraction in its Manufacturing Purchasing Managers’ Index (PMI) has failed to spook investors. This week, the People’s Bank of China (PBoC) made its largest liquidity injection since January, fuelling the expectation the nation’s central bank has the tools to fix the recent slump. (Bloomberg)

Bring ‘em on!

Back in February, Trump threatened the EU with auto tariffs that would cause disproportionate harm to German manufacturing. The administration, was at that point, preoccupied with Chinese trade negotiations, and it was suggested that the President wouldn’t wish to open another front until talks with China were concluded ahead of the autumn election season. This morning, those suppositions appear to be wrong in every conceivable way. Overnight, Trump made a new threat against neighbouring Mexico. According to Bloomberg, the US will impose 5.0% tariffs on all Mexican goods, starting June 10th, and increase to 25% by Oct 1st. On Twitter, Donald Trump said the duties would be in effect ‘until such time as illegal migrants coming through Mexico, and into our Country, STOP.’ This brings into question the theory that the US administration has a timetable for resolution.

Bottom line: This new point of tension has unsurprisingly stoked risk-off sentiment and taken the US Dollar to new trade-weighted highs. This could be more posturing so it might not be a good time to count our chickens yet. With that said, the data calendar is quiet today so a long-Dollar stance may persist into next week.

Can Dollar strength continue?

Just at a time where Donald Trump looks to increase the number of trade war fronts in play, fundamental risks are mounting that could shape the immediate path of the US Dollar. Before the Mexico news, Federal Reserve vice chair Richard Clarida commented that the US central bank is prepared to cut rates if it sees an emergence of downside risks to the US economy. What we’re seeing is Trump simultaneously praising the strength of the economy, while single-handedly adopting policies that will trigger pessimism on growth. With inflation subdued, today’s University of Michigan Consumer Sentiment figure will provide an insight into whether escalations have hit confidence levels, pulling the Dollar back from year-to-date highs.

Bottom line: The initial knee-jerk reaction to buy the Dollar could be very short-term. As downside risks to the US economy mount, we may see a pullback in anticipation of a Fed rate cut next month.

GBP/USD

The trade-weighted Pound index still has room to fall as it currently sits 1.5% off year-to-date lows. The UK must still resolve the Brexit impasse as well as find new political leadership, so further downward movement into the 1.25 region is plausible.

EUR/USD

The pair appears to be sticking to its clear year-to-date downward channel as the peaks are getting ever closer to 1.11. Having found support just shy of 1.11 once again, unless fundamentals improve, we’re unlikely to see a notable move higher.

GBP/EUR

Following Sterling’s recent downward shift, the pair remains stagnant at its 1.13 support level moving no further than 80 ticks higher. The market expectation for GBP/EUR volatility is an annualised 5.0%, which indicates that divergence from the recent stationary trend seems unlikely.