In the morning of Monday, trading in the foreign exchange market was calm and measured. Against the background of an almost empty economic calendar, the euro-dollar pair showed minimal price fluctuations around the 1.1220 mark, that is, almost at the level of the Friday close. However, at the beginning of the US session, market volatility increased significantly: in a matter of hours, the dollar index slumped from 97.09 to 96.82 points, and such defensive tools like the yen and gold grew significantly (in particular, the USD/JPY pair approached the bottom of the 109th figure - for the first time since February of this year).
The euro-dollar pair also responded to the weakening of the US currency - the pair updated not only its high of the day, but rose to three-week price highs, namely to the mark of 1.1264. In other words, the morning attempts by the EUR/USD bears to return the price to the region of the 11th figure (the attempts, by the way, were of a rather uncertain nature) again failed. And although the upward impulse did not receive its continuation, buyers of the pair were still able to test the price level higher, thus moving away from the most important levels for bears.
Just two hours later, the dollar returned to its previous positions, and traders wondered - what caused such a "storm of volatility"? Indeed, despite the transience of the upward impulse, traders felt a serious and, most importantly, unexpected shake. According to the overwhelming majority of experts, the dollar bulls were "scared" of China's retaliatory steps in the trade confrontation between Beijing and Washington.
We cannot say that China's response immensely surprised the market: immediately after the US' introduction of additional duties, representatives from Beijing stated that they were studying the possibility of using mirror response measures. Perhaps traders were confused by the peace-loving rhetoric of China Deputy Prime Minister Liu He, who, following the results of the negotiations, declared "cautious optimism" regarding the future prospects of the negotiation process. In addition, both sides were satisfied with the dialogue, and on Friday even Trump expressed his readiness to cancel the imposed duties, if Beijing and Washington nevertheless come to a common denominator.
But the events of the last two days have significantly reduced the likelihood of such a scenario. First, at the weekend Trump demanded not to make a decision on the deal and conclude a trade agreement, "not waiting for the results of the next presidential election in the United States. It is likely that the root of the problem lies precisely in this aspect. Let me remind you that recently, former US Vice President Joe Biden mentioned his participation in the 2020 presidential campaign - a very popular and heavy figure in the United States.
Absolutely all pre-election polls predict his victory in the primaries of the candidate for the presidency of the Democratic Party. According to the research of three sociological centers, Biden is at least 10% ahead of his closest rivals. This is a very significant lead. According to experts, such a confident result will allow him to focus his criticism on Donald Trump, and not on competitors in the primaries. In other words, the current US president has a truly dangerous rival in the fight for a re-election - and the Chinese are well aware of this.
Moreover, Biden is known for being a supporter of "warm relations" with China - when he was serving as vice president, he repeatedly called for expanding bilateral cooperation with China. However, the intrigue of the US presidential election will continue for a long time, at least over the next year. Therefore, Trump uses the carrot and stick method to force the Chinese to enter into a historic trade deal. In particular, on Saturday, he threatened Beijing with the fact that if the deal was concluded during his second presidential term, the stipulated conditions for the Chinese would "significantly worsen."
But China responded to Trump's threats with retaliatory duties for US goods worth a total of about $60 billion. New tariffs will affect about 5,000 commodity items: for 2,493 of them fees will increase to 25% of their value, for 1,078 items even more - by 20%, and by 974 items - up to 10%. The rest will be subject to a 5 percent duty.
In addition, according to the American press, in the near future Beijing may substantially reduce or completely stop purchases of American agricultural products and energy resources in the United States. Also, according to several sources, the Chinese are considering the option of "getting rid of" US Treasury bonds. By the way, this factor, in fact, pulled down the dollar throughout the market today - though only for a few hours. The market quickly doubted that China would take such measures, at least in the foreseeable future. In general, most currency strategists predict increased tensions in relations between China and the United States, but doubt that countries will return to a full-fledged trade war.
Thus, the US and China "showed their teeth", but so far they have diverged around the corners of the market. If Beijing and Washington are satisfied with the achieved effect, the market will return to its regular life, following the macroeconomic statistics. Otherwise, such price jumps will again be repeated against the background of rising anti-risk sentiment.
The material has been provided by InstaForex Company - www.instaforex.com