Despite the absence of important economic releases in the USA, Thursday turned out to be a very active day for the foreign exchange market. The US dollar which strengthened against the euro, the Australian dollar, and other currencies in the European session, then turned around and closed trades in the red against all major currencies. The USD/JPY pair was hit harder than others, which was pressured by a slowdown in new home sales. Although the stock market initially ignored the deterioration of relations between the US and China, investors finally began to realize the potential impact of a protracted trade war. Given the statement of the Chinese leader Xi Jinping about the “new long campaign” and “independence”, we should not expect a speedy resolution of the conflict. Turning to the language relating to the strategic retreat of the Chinese Communists from southern China in 1934, Beijing declares that they will not retreat and are ready to make the sacrifice necessary to preserve their industry in the coming years. If China refuses to cooperate President Trump may demand the introduction of new tariffs on Chinese goods worth $300 billion. The impact of the new tariffs on the United States may not be as strong as in other regions but there is no doubt that US companies and consumers will be under blow due to rising prices and lower demand. Wall Street finally recognized the high probability of deterioration in the financial results of companies in the second half of the year so the pair USD/JPY, which has already dropped below 110, can break the mark of 109.
And on the contrary, the euro closed with a rise in growth after in updated the monthly minimum against the US dollar. The sharp recovery was caused by pressure on the US dollar and profit taking at the April lows. Recent economic releases were weaker than expected: business activity in the services and manufacturing sectors in Germany and the Eurozone slowed down. The IFO report on Germany also reflected a determination: the business climate index has fallen to a minimum since 2014. The trade war has hit the mood of the business community and, according to IFO President Fouest, “there is cause for concern, especially about the manufacturing sector”. Markit Economics experts also noted, “moderate business growth amid stagnant demand”. The euro fell against this background but the elimination of the dollar position unfolded a single currency during the American session. Also, do not forget about the elections to the European Parliament, the results of which will be announced at the weekend.
The pound also won back its loses after falling to 1.26. The resignation of the leader of the House of Commons, Andrea Leds increases the pressure on Prime Minister May and some expect her to resign within a week. We believe that for her the situation is very clear and May will be forced to resign before the parliament accepts the agreement on withdrawal from the EU. On Friday a report on retail sales will be published and, given the rising costs reported by the British consortium of retailers, we can expect a strengthening indicator. If costs increase more than expected, the pound (which is clear oversold) may be subject to aggressive short squeezing.
Good data does not seem to have affected the Canadian dollar at all. Wholesale sales rose sharply in March, reflecting the growth in retail sales but instead of resuming the decline, the USD/CAD pair rose amid falling oil prices by almost 6%. Now that prices have fallen below $60 a barrel, we can expect further losses if the risk appetite remains low and concerns about a trade war increase. On the other hand, Australian and New Zealand increased while the trade surplus increased to 433 million.
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