Iranian Threats
President Trump warned President Hassan Rouhani to “never, ever threaten the United States again” as a comeback to the Iranian President’s earlier statement claiming that “war with Iran is the mother of all wars.” The US President’s twitter account suggests the two counties are nowhere near reconciliation yet. President Rouhani’s remarks were likely a response to rising social tensions and anti-government protests in Iran. One of the underlying reasons for these tensions is the devaluation of the Iranian rial, in part due to the Iranian government’s foreign policy. Iran has accused the United States of inciting internal dissent in an attempt to meddle with their domestic affairs and exert additional pressure on the country’s clerical leadership. The question of Iran remains one of the most divisive and polarizing issues between members of the international alliance the US is a part of.
Declaring a Currency War?
Last Friday Trump set his sights on the Fed’s interest rate policy. According to the President, the Fed’s continuous strengthening of the dollar puts the US at a competitive disadvantage in global trade. This opened up a new front for the trade war. It seems President Trump would like to draft the dollar into a conflict that has so far only been fought with tariffs. Trump’s Friday press conference also included mentions of China, when the President threatened to raise tariffs on all imported Chinese products across the board. At this point the President may be endangering the interests of corporate America, possibly more so than those of China. The negative news had a powerful impact on the markets. The Nikkei dropped by 1.5%, while the Australian and South Korean indices declined by 1% each during today’s Asian trading session. Chinese indices on the other hand managed to show positive results, with the Shanghai Composite and the Hang Seng closing 1% and 0.17% higher respectively.
EURUSD
Last week the EURUSD currency pair closed with a considerable strengthening of the euro. On July 19, price was still at its monthly low of 1.1575. This level turned out to be a persistent line of support, causing price to rebound and make its way to 1.1752. Trump’s criticism of the Fed’s interest rate policy may have played a part in the dollar’s weakening, however, the recent G20 summit most likely had a major impact as well. The euro’s sudden strengthening could be a sign of a reversing trend, however, long term indicators do not suggest any kind of breakout just yet.
The pair’s rising movement paused at 1.1752, then entered a correction period that pushed price back to the green trendline. It’s feasible to think that this correction is an attempt to regain momentum before price attempts to retest and possibly break the 1.1752 resistance line. As seen on the chart, this line has been a persistent obstacle that prevented EURUSD from going higher on several occasions over the course of July.
The upcoming European Central Bank (ECB) interest rate decision this Thursday will likely reveal crucial information about the planned closure of the ECB’s bond-buying program as well as forecasts on their interest rate policy and its economic effects. It’s also worth keeping an eye out for the Fed’s reaction to President Trump’s earlier remarks. Though the Fed is independent from the government, the President’s words could still affect committee members and potentially cause them to lose confidence in continuing their policy of raising interest rates. There are still many points of uncertainty concerning the direction of the EURUSD, however, price rising above 1.1790 could be taken as a noteworthy indicator of a trend reversal.
USDCAD
Traders of the USDCAD saw their fair share of volatility last week, though they were unable to pin down any one direction. The period was characterized by sudden surges in price and equally sharp drops forming peaks and valleys. The Canadian dollar eventually came out on top, but the USD is not out of the fight yet. The CAD was backed by strong fundamentals last week, surprising the market with a 2.5% inflation rate for June. Based on May’s 2.2% figure, the estimate for June’s Consumer Price Index was 2.3%. Aside from rising inflation figures, retail sales also increased by 2%. The combination of high inflation with high retail sales will make it difficult for Canada’s central bank to keep its inflation in check with its current interest rate, meaning the possibility of a rate hike is once again on the the table. This of course also encourages investors to buy more Canadian dollars.
During Friday’s trading session, the Loonie dropped from 1.3238 to 1.3129 over the span of one hour. This sharp decline was unusual for the currency pair otherwise known for its low volatility. The drop caused price to fall below the purple upwards trendline. The decline stopped at 1.3115, confirming the power of this support line. Since the USD’s initial July breakout, this has become the primary support line for the currency pair, replacing the previous 1.3067 support line. The 1.3067 line still holds a special importance, since it used to be the upper limit of the previous price channel before breaking. Later it became the lower limit of the newly formed June-July range, however, it was only re-tested twice, since the 1.3115 line halted most attempts the Canadian dollar made to gain more strength. The USDCAD is now showing a gradual upwards trend, which could only be broken if price fell below 1.3067. The current price pattern seems to be solidifying, meaning the next potential price target will be the 1.3384 resistance line, which will also act as the upper limit of this range.
Sincerely,
Laszlo | Market Analyst
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