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G20 pushes back on the US, warns on growth

Having spent the last few months worrying about a trade war, markets got something else to worry about at the end of last week when President Trump outlined his unhappiness about the strength of the US dollar, as well as the prospect of further rate rises from the US Federal Reserve.

He went on to accuse the EU and China of deliberately weakening their currencies, as well as expressing a willingness to impose tariffs on all Chinese imports into the US.

These comments prompted a sharp fall in the US dollar and raised concerns that currencies may well be about to be brought onto the field of battle as another weapon in the war of tariffs and trade, as the US administration tries to limit the effects of its own fiscal stimulus, and buoyant economy on the US dollar.

There was no sign at the weekend G20 finance ministers meeting that either side was prepared to give ground with the French finance minister Bruno Le Maire reiterating that the EU would not negotiate with a “gun to our head” and the German finance minister Olaf Scholz pushing back on the claims that the EU artificially holds down its currency.

The G20 communique did acknowledge that the global economy was still growing at a decent rate but warned that the current uncertainty was adding to global risks, however despite these concerns US Treasury Secretary Steve Mnuchin’s assertion that the EU’s retaliation to US tariffs wasn’t having a widespread effect on the US economy, suggested that the US was digging in for the long haul.

For now, the current uncertainty doesn’t appear to be being reflected in US markets which have continued to shrug off most of the uncertainty around recent events, while European markets retreated sharply from their highest levels in one month at the end of last week. 

It is against this uncertain backdrop that this week’s meeting between President Trump and President Juncker of the EU Commission will be closely watched, given the US President’s recent description of the EU as a “foe”, as well as this week’s latest US Q2 GDP data, which could well come in anywhere near as high as 4% on an annualised basis.

A reading anywhere close to this level will more or less guarantee another rate rise from the US Federal Reserve at their September meeting, potentially putting additional upward pressure on the US dollar.

Other events this week include the latest ECB interest rate policy decision, on Thursday, which is not expected to contain too many surprises.

Despite Fridays sell off, markets in Europe are still well above their lowest levels this year, which means that investors still don’t appear too concerned for now, however that could change in the coming days, especially if there is no sign of the US ratcheting down its rhetoric, or the EU and China institute retaliatory measures to any new US measures.

EURUSD – last week’s low at 1.1575 prompted a reversal back above the 1.1700 area which could extend towards trend line resistance at 1.1760, from the June peaks. Support comes in at 1.1620.

GBPUSD – after a new 10-month last week, the pound reversed sharply on Friday posting a bullish reversal which could signal a move back to the 1.3280 area. A move above the 1.3180 could well be the signal for such a move. We have support at the 1.3070 level.

EURGBP – fell just shy of this year’s peak at 0.8970, slipping back from the 0.8960 area. We have support at the 0.8920 area and below that at the 0.8870 area.

USDJPY – after last week’s failure at the 113.20 area the US dollar slid back. The break below the 112.20 area prompted a deeper sell off which could well see find support at the 111.20 area. A move below 112.20 could well see further losses towards 111.20.

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