US and European futures are trading flat as investors digest various sets of economic and geopolitical events that occurred over the last 24 hours. On the one hand, we have more positive news that perhaps the US could be reversing some of the tariffs imposed on China, which should ease off inflation, as we mentioned yesterday. On the other hand, we have a significant increase in geopolitical tensions after the US President announced that he would not hesitate to use the US military to defend Taiwan.
In terms of the economic docket, we will see the French, German, and Eurozone’s Flash Manufacturing numbers hitting the tape. The number which matters the most is the German Flash Manufacturing PMI, as Germany is the biggest economy in the Eurozone. The forecast is for 54.1, while the previous reading was 54.6.
Later in the day, we also have the Flash Manufacturing reading data for the US, and the forecast for the US Flash Manufacturing and Services is for 54.9 and 56.9, respectively.
Fed Chairman Jerome Powell and the ECB president Christine Lagarde will be speaking later today. Their speeches could increase volatility in the market if they drop something that the market players don’t expect.
US President Joe Biden said he would evaluate Trump-era tariffs on Chinese imports, fuelling a surge in the offshore yuan. Biden said he’s thinking about reducing specific tariffs and would discuss it with Treasury Secretary Janet Yellen when he returns from Asia. “We did not implement any of those duties; the previous government did,” he claimed. The majority of the tariffs imposed by his predecessor, Donald Trump, have been retained by the Biden administration. However, with inflation at its highest in four decades, the president has been pressed by certain economists, members of Congress, and the US Chamber of Commerce to decrease or remove tariffs.
President Biden increased geopolitical tensions further yesterday by saying that the US would intervene to defend Taiwan in the event of a Chinese invasion. Investors and traders are already tired of one war that is taking place between Ukraine and Russia. The soaring inflation situation is the direct result of this war, which fuelled energy prices, but we are also on the verge of an agriculture commodity crisis.
Biden’s statement on Taiwan has deviated from the US stance of having strategic ambiguity. In the news conference yesterday in Tokyo, Biden made it clear that the US would intervene by using its military to defend Taiwan. This represents significant volatility for the global markets as the US has used its military in the ongoing war in Ukraine, but it has provided weapons and financial aid. Biden said, “We agree with the One China policy; we signed up to it and all the subsequent accords,” he continued. “But the concept that it can be taken by force, just seized by force, is simply not — it is simply not suitable.” It will dislocate the entire area and have similar activity.
The Euro has become the most interesting currency among G10 for the past 24 hours. The ECB’s president Christine Lagarde has increased the speculations that the bank could be increasing the interest rate as soon as the end of Q3. This means that era of negative rates could soon be coming to an end. This particular factor has pushed the Euro higher against most G10 currencies. But here is a dilemma that traders need to pay close attention to before they can begin placing large bids on the Euro. Is the Eurozone’s economy strong enough to withstand the shocks of higher interest after such a long period of lower interest rates?
Yes, yesterday’s IFO Business confidence from the biggest economy of the Eurozone has suggested that economic situations aren’t that dire as the number came in better than expected. But the reality is that it is one number, and Germany doesn’t necessarily represent the entire Eurozone. We think that the further price action for the Euro could look very similar to that of the Sterling, which began to move higher initially when the bank announced increasing the interest rates. But now, the Sterling has lost its mojo, and despite the Bank of England increasing the interest rate a few times this year, it is struggling to move higher against the dollar.
The reason is simple, the actual economic conditions in the UK are only deteriorating with every passing day, and this is keeping the selling pressure on the BOE. The BOE, on the other hand, has no other option but to continue to increase the interest rate to bring inflation lower. In addition to that, we have Brexit woes that adversely influence the economic situation, not to mention the conflict between Russia and Ukraine.
The Euro is no different as well, so even though we do see some bids pushing the Euro prices higher against the dollar and Sterling, we think it is likely that this trend may not last long. The risk of the Euro/dollar pair hitting parity is still very much on the table, and the odds are still strong that this time we could see the Euro/dollar forex pair hitting parity.