Announcement Day
The Trump administration has been waving around the announcement of the tariffs on 200 billion dollars worth of Chinese products for weeks. According to the latest news, this announcement may happen today. Analysts have suggested that instead of the initial aggressive tariffs, the final result could turn out to be a 10% increase. Meanwhile China threatened to stop all US trade negotiations if these tariffs go into effect. Doing so would escalate tensions and drastically reduce the possibility of a compromise. The mounting internal pressure puts Trump in a delicate situation not only due to the increasing number of corporate lobbyists criticizing the tariffs, but also because of the upcoming elections. Backing down against China could harm the credibility of Trump’s hard line politics and claims of being tough on trade.
Uncertain Outcome
Last week was underwhelming for the US stock market. Major indices all showed minimal amounts of price movement, giving no definite trend for the Asian session’s opening. The Asian exchange’s results were mixed, with the Shanghai Composite and the Hang Seng being over 1% in the negative while Australia’s index increased by 0.32%. Lead economists now warn about the possibility of another financial crisis. These opinions are substantiated by more than just the rising tensions in international trade. It’s also the shrinking supply of money due to the Fed’s repeated rate hikes, that’s already starting to manifest in emerging economies before anywhere else. This could lead to new geopolitical conflicts which may potentially set back global economic development.
In depth
Silver
14 dollars is the primary support line for silver futures and price is currently only 3 cents away from it. If the line were to break, then silver’s free fall since June 15 could take another turn. Investors definitely seem to be placing their hopes on the USD. For there to be any changes in the precious metals markets, the dollar’s weakening would need to solidify into a trend, which at this point seems rather unlikely.
Fed’s interest rate decisions are the decisive market event that analysts tend to predict with an 80-90% accuracy. This is a reality that silver futures traders have no choice, but to live with. The declining demand in speculative silver positions is closely linked to the dollar’s strength. Despite pressure from the fundamentals, short positions could still be profitable. The MACD indicator at the bottom of the chart shows that price swings have been getting smaller and meanwhile the moving average is reaching new lows. This divergence is usually a sign of market exhaustion. If the decline loses momentum, it could easily lead to buying pressure due to short covering. Even so, an uptrend is only a potential scenario if the 14 dollar support line doesn’t collapse. If price does start to increase, then the nearest line of resistance would be around 14.44.
EURGBP
Seeing how the pound strengthened over the past two weeks, it’s evident that the GBP has broken the euro’s rising trend and put the currency pair on a downwards trend. The London government’s policies have not done much to strengthen the pound, while the Bank of England’s rate hikes did. Aside from interest rate decisions, the pair’s relative value is also heavily influence by the ongoing Brexit negotiations. According to Prime Minister Theresa may, as the deadline for the negotiations draws close the final result will either be the current Brexit agreement or there will be no deal. The latter case likely does not bode well for the pound.
Looking at the Fibonacci retracement levels between the 0.8617 low and the 0.9092 high we can see the downwards correction could reach all the way to the 50% retracement level. The current price at 0.8855 is only 40 pips away from the 50% retracement level. If the pound can gain enough momentum to keep strengthening, this is the level it would likely reach. It’s also worth keeping in mind that the last downwards correction happened in two waves, which is relevant in terms of business cycles. If a second downwards wave is not followed by a third, then it would confirm that the pound’s strengthening was merely a correction. In that case the trendline breaking will be followed by another upsurge back to the previous high.
Sincerely,
Laszlo | Market Analyst
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