The euro-dollar pair is on the verge of falling into a tailspin to the support level of 1.1120, followed by a test of the 10th figure. But, despite the pressure of sellers, the pair remains at the borders of the 12th figure, demonstrating a certain resistance. The financial world is frozen in anticipation of the key event of this week – the next round of talks between Beijing and the United States. However, this meeting is under a big question: after Trump's announced intentions to increase duties this Friday, the entire negotiation process was under threat. Therefore, the main intrigue of the next few days is whether the Chinese will come to the United States or ignore the invitation of the American side. The latter option will indicate the breakdown of negotiations and the beginning of the next round of the trade war.
The belligerent attitude of the White House has changed the fundamental picture of the foreign exchange market. The growth of anti-risk sentiment was reflected in almost all currency pairs - to some extent. However, traders are clearly not in a hurry to give in to panic. Even the commodity currencies that are most sensitive to the permanent aggravations of the US-China relations, have suspended their decline. The euro-dollar pair is also staying near the opening level, demonstrating a fairly calm (although descending) flat.
This "stress resistance" of the market is due to several factors. Firstly, the market does not really trust Trump, who has already demonstrated "unusual" behavior on the eve of key/crucial trade negotiations. For example, in the process of discussing the new North American Free Trade Agreement (NAFTA, and after its "rebranding" - (USMCA), the US president changed the previously agreed terms several times and at the last moment refused to sign preliminary agreement documents, citing insufficient benefits. As a result, Canada was forced to make significant concessions (especially in the dairy industry), putting an end to the multi-month negotiating saga.
Donald Trump is an accomplished businessman, and often uses the experience of entrepreneurship in political relations. In November 2018, just a week before the key talks with Beijing, Trump prudently "raised rates", threatening to introduce new duties on products worth 237 billion dollars – from 1 January. Thus, it expanded the range of the forthcoming negotiations, while the duties that were not yet imposed became an element of "bargaining" with XI Jinping. This tactic really worked: following the December talks, Washington did not introduce additional tariffs, thereby "allowing" the working group to continue negotiations.
In my opinion, today Trump continues to raise rates, bargaining for more favorable terms of the future deal. It is significant that Beijing's calm reaction to this attack by the US President serves as an indirect confirmation of this assumption. According to the American press, China deliberately downplays the importance of Trump's voiced threats in order not to aggravate the situation in the markets. The Chinese did not "slam the door", canceling the planned visit.
However, at the moment there is no reliable information about whether the next round of talks will take place on May 8. According to some sources, some representatives of the Chinese delegation, who were supposed to leave for Washington today, remained in Beijing - "until certain instructions". According to other information, Deputy Prime Minister Liu He still intends to visit the capital of the United States, but somewhat later, after the Chinese side clarified Trump's intentions through diplomatic channels.
According to the American press, the US president announced a planned increase in duties after a report by US Trade Representative Robert Lighthizer, who, in particular, announced that the PRC refused to comply with some previous agreements. It should be recalled here that at the beginning of this year, a real backstage struggle unfolded in the presidential administration between Finance Minister Stephen Mnuchin and US Trade Representative Robert Lighthizer. The first takes a softer position regarding the resolution of the Chinese question, the second is a typical "hawk". So, according to Mnuchin, the abolition of duties (partial or full) will push Beijing to more serious concessions in the context of a future trade agreement. However, Lighthizer thinks otherwise - in his opinion, the Chinese will regard this step as a manifestation of weakness and indecision. Apparently, today, Trump took the side of Lighthizer, tightening his rhetoric.
Given the background of the US-China talks, it cannot be excluded that Trump will soon replace the "wrath for mercy" again, giving the green light to further negotiations. In this case, the risk appetite in the market will increase significantly, putting pressure on the dollar. Otherwise, the likelihood of a resumption of trade war will increase again, with all the ensuing consequences. Tomorrow it will become clear in what direction will further events develop: whether the Chinese will back down or decide to continue the trade war.
The material has been provided by InstaForex Company - www.instaforex.com