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Tillerson departure increases investor tensions

The US dollar slipped back for the third day in succession yesterday, pressured by a combination of inflation data that continues to remain benign, and the surprise sacking of US secretary of state Rex Tillerson.

Stock market reaction was initially indifferent, however as the news started to sink in and investors absorbed the high profile departure of yet another internationalist from the Trump administration, following on from Gary Cohn’s departure last week, it occurred that the constantly changing face of Trump’s team speaks to an administration in disarray, and which might not be as market friendly going forward. It is also becoming increasingly difficult given the constant revolving-door nature of the arrivals and departures in his administration to get a sense of which way the president is leaning on any of his economic policies.

With two high profile departures in a matter of days it could be argued that the Trump administration has lost two of the grown-ups in the room when it comes to economic and foreign policy. Having come off the back of a strong run of gains, yesterday’s events afforded equity investors the perfect excuse to indulge in a spot of profit-taking as both European and US equity markets finished the day lower.

Only time will tell whether the new appointments are able to regain the confidence of investors, particularly at a time when relations between the US and the EU are under strain over the subject of tariffs, as concerns rise that China will be next in the crosshairs, for trade sanctions..

This tension also explains why the DAX, of all European markets saw the biggest falls yesterday, as the higher euro, along with President Trump’s fixation on Germany’s trade surplus with the US makes it the pressure valve for investor concern about the implementation of tariffs.

Not surprisingly this is likely to be reflected in a lower open when European markets reopen later this morning, as Asia markets also declined on the back of yesterday’s uncertainty. The latest Chinese industrial production and retail sales data for February which came out at 7.2% and 9.7% respectively, both improvements on the January numbers were almost a footnote.

On the data front following on from yesterday’s CPI data, we’re also getting the latest US retail sales data for February. The last two months have seen US retail sales fall short of expectations raising concerns that despite evidence of slightly higher wages that consumers are starting to rein in some of their spending. This shouldn’t be surprising given that up until Thanksgiving spending had been strong. This would suggest that we’ve simply seen some balance sheet replenishment after a strong run of gains. The recent cold weather could also have caused a slowdown, but we should still expect to see a pickup in February, with expectations of a rise of 0.3% after a 0.3% decline in January.

While CPI came in as expected attention now turns to the latest producer prices numbers and with ISM prices paid numbers at multi year highs it would be a surprise if we didn’t see some price inflation here. PPI for February is expected to tick higher to from 2.2% to 2.6%.

EUR/USD – the euro has continued its climb off 1.2270 area and 50 day MA, heading back towards the 1.2400 level and towards last week’s peaks at 1.2446. We still seem to be in a range, with resistance up above the 1.2500 area. A fall below 1.2260 would suggest a retest of the range lows at 1.2160.

GBP/USD – broke above last week’s highs at 1.3920, heading up to the 1.3980 in the process, and coming within touching distance of the 1.4000 area.  The break above 1.3920 has the potential to open up a retest of the 1.4080 area. On the downside we have support at 1.3710, this month’s low, and below that at 1.3660.

EUR/GBP – has found support at the 0.8850 area for the time being but still remains susceptible to a move towards the 0.8810 area, while below the 0.8920 area.

USD/JPY – the failure to sustain a move beyond the 107.20 level yesterday has seen the US dollar slide back, a failure that runs the risk of a return to this month’s lows. A move below 105.00 targets the 100.00 area. We need to move above the 108.30 area to stabilise.

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