By Matthew Ryan – Head of Market Strategy at Ebury International Payment Company

President Trump has pledged this week to impose 25% duties on Japan and South Korea since August 1st. The threat of boosting protectionism should have led to a dollar retreat, but this was reinforced on Tuesday, showing that the narrative “sell America” ​​may lose ground. The White House had previously announced that duties would come into force today, but the three -week postponement of the deadline by August 1st offers some room.

The minutes of the June FOMC meeting will be published tonight and will be closely monitored by the markets. We already know that two members, Bowman and Wallers, openly in favor of reducing interest rates at the July meeting, so it is interesting to see if they expressed their disagreement last month.
We will also monitor the yields of British government bonds during the week. Officers increased abruptly last week due to labor’s inability to even spend limited cuts in social spending, a worrying sign that can forecast tax increases in autumn.

The uncertainty about US duties will keep investors alert this week, but markets are optimistic that common sense will prevail.

US – the market ignores the threats of duties

Washington’s announcement that it intends to increase duties in Japan and South Korea to 25% from August 1 was treated with relative calm from markets. The most remarkable move was the fall of the YEN, but it is worth noting that the dollar was reinforced against most coins, which reverses the trend after “release day”.

Investors are currently not taking Trump’s threats seriously, believing that there will be at least a few compromises by the end of the month to avoid significantly higher duties with key US trade partners (especially the EU).

At the same time, there is a general feeling that the slowdown in the US economy due to duties will not be as serious as markets were afraid. The employment report last week was not as negative as expected, and indications show a possible recovery of growth in the US, based on Atlanta’s Fed estimates for an annual expansion of about 3% in the second quarter.

This suggests that, although the trend “sell America” ​​has not disappeared, the arguments in its favor have been weakened, especially given how much short positions have increased on the dollar.

Eurozone – The euro is reinforced as it is approaching trade agreement with US

The euro seems to find support above the 1.17 level against the dollar, as markets are optimistic that the US -EU trade agreement is coming to an end, which will prevent the increase of duties on August 1st. Trump said yesterday that in two days he would send a letter to the Union warning of an increase in duties, but European sources show that the two sides are approaching a preliminary agreement that will maintain import duties at 10%. We may still have developments today.

This could boost the euro over most coins, although a possible relief reaction in favor of the dollar can limit the rise of Eur/USD.

There is not many new macroeconomic elements from the eurozone for the rest of the week, so the attention will focus on commercially and the ECB’s commerce and positions (Lane, De Guindos and Nagel speak later today). Guidance for monetary policy will probably be limited due to great uncertainty in commerce.

United Kingdom – Press under pressure due to fears for new taxes

Sterlina is in a difficult position after government folding last week. The inability of labor to promote even limited social spending cuts is alarming, as it almost guarantees that additional tax increases in the autumnal budget will be required.

The Bureau of Financial Responsibility (OBR) warned yesterday of the “vulnerable” fiscal situation of the United Kingdom, noting that the reduction in government flexibility margins may lead to cuts or tax measures above £ 20 billion, which can be increased by 10 billion. month, over 4.6%).

One possible measure is the imposition of wealth tax on the over -flush, but the most important is the possibility of “freezing” income tax thresholds, which, due to the increase in wages, will transfer more citizens to higher tax scales.

None of the options are particularly enjoyable for markets and that is why the pound is undergoing most basic coins.

Attention is focused on GDP data for May (announced on Friday). A slight rise of +0.1% is expected after April shrinkage – a negative surprise would increase the chances of shrinking GDP in the second quarter.

The duties are not expected to particularly affect the British economy, as the United Kingdom remains one of the two countries (along with Vietnam) who have entered into a trade agreement with the US after the release day.