Fundamental Comment

This Week: Trade tensions, services data to shape sentiment

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Investors will focus this week on the latest developments from the trade tensions between the U.S. and its allies, along with the release of services reports from major economies.

US Dollar

The U.S. dollar came under pressure at the end last week on fears of a trade war after the United States said a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports from the EU, Canada and Mexico have become effective.

In response, officials from the EU, Canada and Mexico vowed retaliatory measures on U.S. imported products. 

However, US Commerce Secretary Wilbur Ross said on Friday that negotiations would resume with the EU, Canada and Mexico to resolve all the hanged issues.

Therefore, investors will continue to track the latest developments from the negotiations on hopes a compromise could be reached.

The U.S. dollar index halted its rally last week after touching a new six-month peak at 94.96, where expectations are in favor of seeing a beginning of a downside correction.

This week, the focus will be on the release of important economic data including, services PMI, trade balance, factory orders and weekly unemployment claims.

The ISM-non manufacturing for the month of May will be carefully watched, as it would provide clues about the pace of economic growth in the second quarter.

The services gauge may signal progress to 58.0 in May from 56.8 in April, according to analysts’ projections. 

Euro

The euro found some relief on Friday with the ease in the political situation in Italy and Spain after formation of a new Italian government and appointing a new Prime Minister in Spain.

The shared currency managed to find some support after it fell to a 10-month low of 1.1509 versus the U.S. dollar last week, where it could start to rebound this week.  

This week, the most important data from the euro area will be a revised GDP reading for the second quarter and the final services PMI data.

The third GDP reading is predicted to confirm an ease in the pace of growth to 0.4 percent in the first three months of the year, down from 0.7 percent in the three months before. 

Euro area final services PMI may confirm an ease in expansion to 53.9 in May from 54.7 in April, noting that last week’s data showed a slowdown in manufacturing growth to a 15-month low.

Pound Sterling

The pound sterling snapped some of its losses at the end of last week after hitting a six-month low of 1.3204 against the U.S. dollar.

While the U.K. manufacturing PMI rebounded from a 17-month low in May, investors will give more attention to this week’s construction and services PMI data.

Analysts are expecting improvement in the construction sector, which was the key driver to the firs-quarter’s sharp slowdown, as the PMI may signal a rise to 52.9 in May from 52.5 a month earlier.

The predominant services sector may also widen expansion in May to 54.0 from 52.8 in April.

Should the U.K. data show improvement, the pound would probably gain some momentum that could help it to begin an upside correction. 

Commodities

Last week, gold traded lower below $1300 an ounce amid pressure from the dollar’s strength and after the ease of political uncertainty in Italy and Spain.

Bullion could get the direction this week from the latest developments from the trade tensions between the U.S. and its major trading partners.

Regarding oil, it locked its second straight weekly decline last week amid rising U.S. output and discussions from OPEC and Russia to raise production.

U.S. crude production continued its rise that has begun since late last year, where it registered a record high of 10.47 million barrels per day in March.  

U.S. crude inventories probably soared by 0.18 million barrels in the week ended June 1 after a 3.6 million-barrel decrease a week before, the EIA report due this week may show.

A rise in U.S. crude inventories could add further pressure on oil prices, thereby pulling it crude prices lower towards six-month low of $65.50. 

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