As a result, financial markets have begun pricing in this newfound optimism about an impending trade detente with Washington and Beijing. Investors, understandably, are brimming with cautious optimism. They’ve avoided feeding into trader worries that next week’s talks between President Donald Trump and Chinese President Xi Jinping would escalate trade tensions, a big change from their earlier kneejerk hawkish escalation.
Analysts have suggested a handshake agreement could fill the void of the predicted collapse in talks. This would be an early indication of a shift toward positive market sentiment. The two leaders are likely to talk extensively. If they manage to work out a compromise on trade, these talks might very well ignite the “market melt-up” that many are predicting.
On the currency front, the US dollar has recently gained a little strength. On Monday, traders piled back into tactical short positions in a big way. They responded to speculation of weaker than forecast Non-Farm Payroll (NFP) numbers, sparking fear about the US labor market. As a result, the dollar has found strength across most currencies although results are varied across pairs.
The Euro vs US dollar (EUR/USD) is lingering near important resistance zones but still hasn’t managed a breakout. Market participants are watching this pair in great detail as it approaches the key psychological level of 1.15. Analysts believe that unless European Central Bank (ECB) President Christine Lagarde delivers a hawkish surprise, the euro may struggle to maintain its momentum.
At the same time, the Japanese yen (USD/JPY) USD/JPY is stuck in a purgatory between risk-on and risk-off flows. This predicament is emblematic of the deeper market malaise engulfing investors as they wrestle with dueling signals from macro data and oh-so-fun international developments. In Asia, foreign exchange markets have remained rock solid versus the US dollar. This renewed stability has created a serene trading climate, despite the heightened trade tensions.
Asian equities have been remarkably stoic thus far, proving immune to any increasing tensions of the trade war. This stability is a positive indicator, but it shows investors are taking a wait-and-see approach, focusing on long-term strategies instead of short-term volatility. US stock futures have rolled back from their early highs in New York. Market toll Investors remain wary as they wait to see what happens next with the trade negotiations.
The market is definitely out there—it’s just dazed. Most importantly, it is defying the daily headlines that typically whip up so much volatility. Traders continue to price in a 50 basis point increase to 2.5% by year’s end. This painted the upcoming monetary policy decisions as extremely thrilling.
In the Eurozone we are seeing inflation trends continuing to head in the wrong direction with risks to the economic outlook deepening. Against this backdrop, the ECB is under sharper rising pressure to cut rates and offer more dovish forward guidance to combat these inflationary breakthroughs. If these circumstances were to continue, they would give a powerful downward bias to the euro’s currency exchange rates with other currencies.