Markets Trumped, Dollar crumbles

The European Union was swift to fight back, threatening to slap tariffs on American products if Trump went ahead with his plans. The Dollar crumbles in responses and stock markets tumbled while Gold, ever the safe haven of choice, shines again.

Risk aversion might have been the name of the game during this week, but investors shook off that negativity come Monday morning. The markets left more than a few commentators scratching their heads as a risk-on mood saw a strong bounce in the Dow Jones, S&P 500 and European markets. Concerns of a global trade war eased, with many speculating that Trump’s last Thursday proposal was a negotiating tactic and not a series suggestion. The President himself later confirmed that the tariffs could be dropped if the U.S negotiates a “new and fair” NAFTA agreement. Reports from those close to the Oval Office also suggest Trump is under pressure from all quarters – his allies included – to drop the tariffs. Another factor likely to have contributed to this week’s upside.

With the outcome far from predictable, investors should remain diligent. Financial markets are still highly reactive to tariff developments and a well-timed presidential tweet or press conference would likely see them flounder once again. Major US trade partners, specifically the EU, have been vocal in their intention to impose similar sanctions should Trump go ahead with his plan, another development investors will need to monitor closely.

While Monday and Tuesday’s period of relief and calm may continue supporting stock markets, overall uncertainty still has the ability to limit upside gains.

Dollar calms before the storm

The Dollar could become a battleground for bulls and bears as market players juggle with the conflicting fundamental themes driving the currency.

On one side of the equation, bulls remain supported by expectations of higher US interest rates thanks to Federal Reserve Chair, Jerome Powell. Powell’s debut congressional appearance last week has fueled market speculation that we may see as many as four US rate hikes this year. On the other side of the coin, the bears still have everything to play for and the threat of a trade war continues to put pressure on the Dollar.

The main event risk for the Dollar this week will be Friday’s NFP report, which could offer fresh insight into the health of the US labor markets. A strong NFP print, accompanied by signs of wage growth, may boost market expectations of higher US rates.

The Dollar Index is likely to benefit from such an outcome with prices potentially venturing higher. Speaking of the Dollar Index, prices have broken back below the 90.00 level. Sustained weakness below 90.00 could encourage a decline towards 88.50. Alternatively, a move back above 90.00 would invite an incline towards 90.55 and 91.00, respectively.

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