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Analysts at Westpac note that the trade developments continue dominating global markets, but last week brought some unusual positive news on the topic.

Key Quotes

“On Wednesday Trump agreed with EU Commission President Juncker to “work together toward zero tariffs”.”

“The apparent truce between the EU and US on trade helped briefly lift sentiment in equity markets and the S&P500 hit highs back to January last week. However, we would caution about getting too excited about an apparent shift in Trump’s trade strategies.”

“Our sense is that the US administration may be emboldened and actually double down on the China tariff strategy to try to force ‘fair trade’ agreements there. This would suggest that we have further waves of China tariffs still to come; and if we use the recent history of investigations into China’s trade acts, policies & practices, we would expect to see a further 16bn of tariffs on China appear early August (i.e. as soon as early next week) and a further 200bn early Sep.”

“Indeed, with support for farmers impacted by Chinese retaliation announced by the US administration this week and Trump suggesting last week on CNBC that he was “ready to go to 500″, we would not be surprised to see further tariff action beyond that ahead of the mid-terms. Thus markets are probably right to look through this week’s developments.”

“US data should highlight the ongoing strength in the economy.  Friday’s 4.1% GDP, a solid ISM Wednesday, a continuation of strong payrolls Friday and an FOMC meeting Wednesday that will likely continue pointing towards Sep and Dec moves should support the US$ into August.”

“While the FOMC will be a focus this week, we have two other Central Banks that could move markets. The Bank of Japan faced heavy pressure last week as JGB yields pushed the upper end of yields “around zero” that the YCC policy is targeting. Any change in the YCC policy this week could impact JGB yields, global bond markets and thus USD/JPY.”

“One other central bank meeting that will be closely watched is the Bank of England Thursday. Despite Brexit risks, Bank of England Governor Carney and other monetary policy committee members have indicated August is live  and the prospects for a one quarter of 1% hike this week is around 70%.”