The trade war between the US and China is beginning to take on a rather unexpected development. If until recently the United States was perceived as a stronger side of the conflict, which was reflected among other things in the growth of the dollar, now the situation begins to look a little different.
On May 29, the MSCI (Global Financial Flows Index) provider significantly increased the share of Chinese stocks in the index, which led to an increase in Asian stock indexes. Besides, China's Banking and Insurance Regulatory Commission Chairman Guo Shuqing said that the trade war has a limited impact on the financial markets of China and its influence will be even less in the future.
The correlation between REER (real effective exchange rate) and MSCI makes it possible to point out an obvious link with the growth of the exchange rate and the state of stock indices. The start of the trade war between the United States and China was initiated by the Trump administration that led to an increase in global risks. As a result, the demand for the dollar increased.
Since January 2019, the dollar continued to strengthen while the MSCI index resumed growth.
If the dollar continues to strengthen, then MSCI will also push up, which will look like a reduction in global risks and an increase in the attractiveness of investing in stocks and ETFs. This scenario is unlikely, as the world's largest central banks, express concern one after another about the growing global risks and alleviate financial conditions.
These changes show that the US position is not as strong as it seemed before. China's threat to ban the supply of rare earth metals to US companies in response to restrictions on the Chinese technology sector could be a serious problem for US industry.
The dollar is already far from being so confident, the risk of its weakening is growing. Dollar depreciation can begin in the near future across the entire spectrum of the market, both against commodity currencies and against defensive currencies. This expected decline is not yet perceived by markets as a global reversal and only as a correction so far. Yet, the dollar will weaken if the markets are set to predict that the Fed will cut rates this year.
EURUSD pair
On June 6, the ECB will hold a regular meeting on monetary policy issues, which is expected to consider the specific content of the TLTRO program.
On the eve of the May 29 meeting, the ECB published a report on financial stability, in which he expressed serious concern about the growing risks for economic growth both in the eurozone and around the world. Recognizing that the aggregate level of public debt declined slightly relative to a peak in 2014, the ECB notes that in some countries the budget deficit increases markedly, which is fraught with a resumption of growth rates in government borrowing.
Negative effects of zero interest rates are also accumulating, which is reflected in the outpacing growth of capitalization of companies with low investment ratings.
The overall tone of the review suggests that the ECB is not considering scenarios for reducing rates and will focus all its efforts on targeted lending programs in the hub sectors of the economy. This gives markets a reason to expect a change in the yield spread in favor of the euro in light of the expected decline in the Fed rate this fall. In turn, this will delay capital outflow from the eurozone.
Another bullish factor for the euro is the possible appointment of a consistent opponent of soft monetary policy of the head of the Bundesbank, Weidman, to the post of head of the ECB.
The euro is held above the support zone of 1.1110/20 and is able to start corrective growth from current levels. The immediate goal is the zone of 1.1170/80 and to overcome it will allow us to count on growth to 1.1260/69.
GBP/USD pair
The resignation of Theresa May increases the risks of tough Brexit, but this is unlikely to change the position of Brussels. European Commission President Jean-Claude Juncker. There will be no new negotiations, according to European Commission President Jean-Claude Juncker on Wednesday.
The pound came close to the support of 1.2602 but its breakthrough may turn out to be false since a high level of political uncertainty provides opportunities for any scenario. The trading range will most likely be found between the support of 1.2580 and 1.2602 and at the resistance of 1.2652 / 60 and further to 1.2685/90.
The material has been provided by InstaForex Company - www.instaforex.com