Low volatility expected due to US holiday, manufacturing reports in focus

CMC Markets

Trade tensions dominated the headlines last month and the spat between the US and China is likely to remain at the forefront of traders as some new tariffs on Chinese imports kicked in yesterday.  

Tariffs on $112 billion worth of Chinese imports took effect yesterday. The US plans to impose tariffs on an additional $188 billion worth of Chinese imports between now and mid-December, but at the same time, trade talks are due to continue this month. It seems that Trump is keeping the pressure on Beijing, but at the same time the US president is open to the possibility of a deal. When it comes to the trade dispute, it is a two way street, and China have started to impose tariffs on some of the $75 billion worth of US imports it recently earmarked for levies.

At the end of last week, European equity markets mostly finished on a positive note after the Chinese government said it won’t hit back at the US in terms of the trade dispute. The rocky trading relationship between the two largest economies in the world has shaken stock markets in recent weeks, but cooling of tensions lifted sentiment towards the end of last week. In some quarters, no negative news is positive news, and the absence of heightened trade tensions encouraged some buying.

The euro dropped below the 1.1000 mark – a level not seen since May 2017. The relatively strong US dollar will not make President Trump happy, but then again he seems to be constantly angry.

Overnight in China, the final Caixin survey of manufacturing for August came in at 50.4, and the consensus estimate was 49.8, while July’s reading was 49.9.  It was the highest reading in five months, it might make traders a little less fearful about the cooling of the Chinese economy.

The single currency has come under pressure over chatter about lower interest rates, and or, another bond buying scheme from the ECB. The possibility of a general election in Italy hasn’t helped the euro either. Not long after the talk about the Five Stat Movement and the Democratic Party potentially forming a coalition, the differences between the two sides were beginning to show, and the country might be looking at a general election in the next few months.

Headline CPI in the eurozone remained at 1%, and the core reading also held steady at 0.9%. The reports don’t exactly inspire confidence in the region, and they suggest that demand is soft, and that adds weight to the argument the ECB should loosen monetary policy this month.

For all the panic and worries caused by the movements in US government bonds recently, the US economy is in a reasonably good shape. The core PCE rate, the Fed’s preferred inflation measure held steady at 1.6%. Their target is 2%, but at least the PCE level is standing still. The personal income rate in July was only 0.1%, which is soft, but it was balanced out by the robust 0.6% consumption reading. Spending drives an economy, but living beyond your means will catch up with you in the end.

Gold lost ground on Friday on account of the firmer US dollar, and to a lesser extend as lack of fear in equity markets. This day last week, the metal printed a six year high as the commodity often attracts safe haven funds, and seeing as the major macroeconomic woes are still bubbling away in the background, the metal’s positive run is likely to continue.

Between 8.15am (UK time) and 8.55am (UK time) Spain, Italy, France and Germany will annonce their final manufacturing PMI reports, and traders are expecting 48.6, 48.5, 51 and 43.6 respectively.  

The UK final manufacturing PMI report will be announced at 9.30am (UK time), and the level is tipped to be 48.4.

Global markets are likely to be quiet today as US stock markets will remain closed as it is Labour Day.

EUR/USD – remains in the wider down trend of 2019, and if the bearish moves continues it might target the 1.0900 area. A rally might encounter resistance at 1.1164. 

GBP/USD – has been driving lower since March and if it remains below the 1.2200 region, it might target the 1.2000 area. A move to the upside might run into resistance at 1.2400.  

EUR/GBP – the weekly candle last from mid-August appears to be a bearish reversal, and if the downward move continues it might target 0.8891. A rebound in the currency pair might bring 0.9200 into play.

USD/JPY – last week’s candle seems to be a bullish reversal, and a break above the 107.00 area, might bring 108.59 (100-day moving average) into play. Should the wider downtrend continue it might retest the 104.50 area.