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Bounceback expected for Europe

Stocks lost ground in Europe and the US yesterday on the back of the President Trump’s threat to impose $200 billion worth of tariffs on Chinese imports. 

Mr Trump has turned up the heat on China, and has confirmed there could be even more tariffs to follow. Should the latest threat be imposed it could chip away at Chinese growth given the magnitude of the levies. We are edging closer to a trade war and traders are getting nervous. For the time being we have yet to see any signs of progress, and this could lead to further losses in equity markets.

China is a major importer of commodities, and investors are worried their appetite for minerals might slide should their economy be dented by the tariffs. Oil sold-off heavily and copper fell to a 12 month low. Saudi Arabia boosted their oil output by more than 400,000 barrels per day in June, and that played a role in oil’s decline too.

President Trump clashed with Germany’s Angela Merkel today at the NATO summit. Mr Trump claimed that German reliance on Russian natural gas was ‘bad’ for NATO, and he also called on the largest economy in Europe to increase its spending on defence. Traders are worried the relationship between the two leaders could deteriorate, and Mr Trump could take a firmer line with the EU regarding trade.

At 7am (UK time) and 7.45am (UK time) Germany and France respectively will release their latest consumer price index (CPI) figures. The German report is tipped to be 2.1%, while the French report is expected to be 2.4%. The European Central Bank (ECB) made it clear they won’t be hiking interest rates until at least the back end of next year, but the central bankers will want to see an increase in demand in the currency bloc. It is fair to say that the recent jump in the cost of living in the currency bloc has been driven by the strong oil price, and that is why dealers might not get too excited if the reports are lofty.  

The US dollar index hit a one-week high as traders sought out safe haven assets. Yesterday, the producer price index (PPI) and core PPI both hit levels not seen since late 2011. At 1.30pm (UK time) the US will release the latest CPI report and the consensus estimate is 2.9%, and that would be an improvement on May’s 2.8%. Some traders aren’t overly convinced that the Federal Reserve will hike interest rates twice more this year, and the report could bring about a change in sentiment. 

EUR/USD – has been edging higher since late June, and a break above the 1.1850 area could pave the way for 1.2000 being tested. A move below the 1.1510 region could put 1.1400 on the radar.

GBP/USD – has been in a downward trend since April, but it has been creeping higher recently. A move through 1.3315 could bring 1.3472 into play. If the wider bearish move continues it could target 1.3049.

EUR/GBP – has been in an upward trend since mid-April and if the bullish move continues it could target 0.8900. A pullback might find support at 0.8785 – the 100-day moving average, and a break below 0.8785 might bring 0.8725 into play. 

USD/JPY – has been pushing higher since late-May and if it can hold above 111.39, it could pave the way for 113.57 to be targeted.  A move to the downside might find support at 109.37 – 109.19 area.

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