US-China Trade Tensions Holding Currencies in Goldilocks Limbo-Land
- The US Dollar is moving slowly after Memorial Day, creeping up a couple of pips
- GBP USD likely will be a volatile pair as the UK wonders who will be the next occupant of 10 Downing Street
- Bank of Canada expected to hold interest rates, loonie expected to trade with negative bias
The currency market moves into the final week of the month with a generally cautious tone. The US Dollar Index is making small gains, up 0.2%, with the greenback trading firmer against most major currencies.
China-US trade relations remain in limbo. Investors are reading the tweets and lips of the US President are growing increasingly nervous about more taxes on goods. All eyes will be on preliminary US GDP data due for release this Thursday. We expect currencies to stay within recent Goldilocks trading ranges.
Politics and the pound does not mix well lately. The Sterling remains under pressure as the race to replace Theresa May gathers steam. The market is, however, hoping for a quick return to the Brexit process and investors are waiting for more clarity on future exit plans. We expect the GBP/USD pair to remain volatile with the ongoing “waiting game” to linger around and in the absence of any significant economic data releases.
The Euro is trading within tight ranges, fetching around 1.12 US dollar in a cautious environment. There are brewing tensions between the EU and Italy, while other EU member states are grappling with local political pressures. The market is left with mostly second-tier data to feed on. The Gfk Consumer Climate survey recorded no change for this month. Consumers are expected to spend less given the uncertain economic outlook, and the German economy is likely to be hit the hardest if trade frictions continue.
The USD/CAD pair is staying within familiar ranges and waits for a financial decision from the Bank of Canada. The central bank is widely expected to keep its rates unchanged at 1.75% tomorrow. Global trade tensions, a volatile oil market and debts at high-levels (household and at the company level) will be some of the significant headwinds facing the Canadian economy. The loonie is expected to trade with a slightly negative bias with key 1.35 handle on sight.
The yields on Australian 3-year Government bonds fell to a record low of 1.09% on Monday. The markets have priced an 84% probability the RBA will cut the Cash Rate by 0.25% to 1.25% at its meeting next Tuesday, with many expecting follow-up rate cuts later in 2019.
USD/JPY is sticking around the mid-point of 109. The Yen has appreciated nearly 2.5% so far this month, following an inflow of safe-haven trading activities. We expect the cautious sentiment to prevail with trade talks between the US and China stalling. The economic calendar is light: BoJ Core CPI rose to 0.7% but still running below the central bank’s target. The pair is expected to hover at current levels ahead of the release of the preliminary US GDP numbers.
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