Risk Aversion Intensifies as China Strikes Back

This tit-for-tat action was an uncharacteristically speedy response from Beijing, coming barely two weeks after President Trump slapped $60 billion worth of tariffs on Chinese imports. Interestingly, it appears that the Chinese response is aimed squarely at the Trump heartland, with states that voted for the former reality TV star most likely to feel the ill effects.

This latest development has fueled concerns that a global trade war is brewing – and stock markets are suffering. Investors are likely to remain on a knife edge as the markets anticipate what happens next. Will China impose more tariffs on U.S. imports? Will the U.S. bite back, and, if they do, how reasonable will the response from Washington be?

Whatever the outcome, market players are expected to continue their migration from riskier assets to safe-haven investments. It’s a trend that saw Gold jump on Wednesday, buoyed by market uncertainty. The yellow metal could continue shining as a combination of Dollar weakness, geopolitical uncertainty, and escalating trade tensions accelerate the flight to safety.

Technical traders will continue to observe how Gold behaves around the $1340 level. A technical break above this point could encourage an incline towards $1360. Alternatively, bulls’ failure to keep Gold above $1340 may result in a decline towards $1324.

Will NFP support the Dollar?

The main risk event for the Dollar this week will be the NFP report on Friday, which should offer an insight into the health of the U.S. labor market.

Last week’s revision of fourth-quarter U.S. GDP figures (up to 2.9% from 2.5%) gave Dollar bulls a much-needed boost. While the better-than-expected GDP figures encouraged hopes that the Fed may adopt a slightly more aggressive approach to rate hikes, bulls are still in need of further encouragement and will be paying close attention to the NFP report on Friday.

A solid NFP that displays signs of accelerating wages and labor force strength will be seen as a positive sign that the Fed may raise interest rates more than anticipated this year. Speculation over higher rates will likely push the Dollar higher. Alternatively, a disappointing headline NFP print and soft wage growth figures could expose the Dollar to downside risks.

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