Fundamental Comment

Most important this week: Trade tensions on the horizon

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Investors will focus this week on the latest developments from the trade tensions between the U.S. and China, along with the release of a number of important economic data from major economies.  

US Dollar

The U.S. dollar came under pressure last week after the beginning of a trade war between the world’s two biggest economies.

After China’s retaliatory tariffs on U.S. products at the end of last week, eyes will focus whether U.S. President Donald Trump would increase the heat of the trade war by imposing new tariffs on Chinese products. 

The U.S. dollar index has been under some selling pressure since hitting an 11-month peak of 95.23 on June 28, where it could continue its plunge this week.

However, the U.S. data could weigh on the green currency’s movements, where investors will carefully watch inflation reports due this week.

After a 0.5 percent rise in May, the producer price index may signal a 0.1 percent increase in June, while it may have risen to 3.2 percent on the annual basis from a previous of 3.1 percent.

One day later, the U.S. consumer price index could signal a 0.2 percent soar on the month and a surge to 2.9 percent on the year from 2.8 percent.

Some members expressed “concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn,” Fed minutes released last week noted.

“Many participants saw potential downside risks to economic growth and inflation associated with political and economic developments in Europe and some” emerging market economies, the minutes added.

Therefore, the inflation data will be very important in the coming period as it will probably shape the pace of interest rate hikes by the Fed in the second half of the year.

Euro

The euro found some relief last week after the improvement in German factory and industrial production data that raised expectations of stronger growth momentum in the second quarter.

Perhaps the most important this week would be the ECB minutes that will divulge details on the economic conditions that influenced the ECB’s Governing Council monetary decision last month.

Also, finance ministers of euro area countries will meet to decide possible new debt relief measures for Greece.

Most probably, the euro will be affected more by the general sentiment in the market, which will mainly focus on the undergoing trade war and how Europe will respond to Trump’s tariffs.

Pound Sterling

The pound sterling rose slightly versus the U.S. dollar last week amid progress in U.K. major sectors, which raised expectations of seeing a widening expansion in the second quarter to 0.4 percent after a 0.2 percent growth in the first quarter.

Starting from this week, the ONS will start publishing a new monthly GDP measure for the month of May that will be released along with the usual quarterly series.

Investors will also focus on U.K. manufacturing production and goods trade balance for May due this week.

Commodities

Last week, gold managed to rebound from its lowest level in seven months as the retreat in the U.S. dollar encouraged some demand on the precious metal. 

Bullion could get the direction this week from the latest developments from the trade tensions between the U.S. and China.

Regarding oil, it fell from a 3-1/2 year high the previous week after an unexpected build in U.S. crude inventories and Trump comments on the necessity of OPEC to cut its fuel prices.

Trade tensions and rise in Saudi production also have pushed crude prices lower last week, and therefore investors will keep their eyes open on any updates from the trade war.

U.S. crude inventories probably dipped by 1.7 million barrels in the week ended July 6 after a 1.3 million-barrel decrease a week before, the EIA U.S. government report due this week may show.

While further fall in U.S. crude inventories should help oil prices to rise again, the impact of any updates from the U.S.-China trade dispute could have a larger effect.

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