After the publication of the White Paper on Sunday, which brought down markets at the opening of the week, China took a small step back. The Ministry of Trade of China said on Tuesday that trade differences between the countries should be resolved through negotiations. The softening of rhetoric was seen positively by markets as a sign that China is interested in finding a mutually beneficial solution, not in intensifying confrontation.
Meanwhile, the yield of 10-year US bonds decreased at the moment to 2.069% this week, this is the minimum since September 2017, and clearly indicates the expectations of the markets at the Fed rate. According to the CME, the futures on the rate more confidently indicate not one, but two rate cuts in the current year, plus two cuts in the next 2020.
On trading floors on Wednesday, the mood is generally positive, and it is caused by the reaction to the speech of Fed Chairman J. Powell, who promised to "properly" respond to the risks associated with the global trade war. The "proper response" in the face of the risk to the normal growth of the US economy – this is a direct hint at the softening of the Fed's position, which was perceived by the markets quite clearly.
Can we assume that the softening of the Fed's position will breathe into the falling markets an impulse to resume growth, or is it just a correction that will end with a new wave of decline? The second looks more likely. A trade war cannot be completed by the efforts of only one side, besides it applies to new participants – from June 5 from the list of countries with trade preferences with the United States, India is excluded. Published on Wednesday morning, China's service sector PMI Caixin index showed a significant slowdown in may from 54.5 p to 52.7 p, which may soon lead to a new wave of risk avoidance.
In the short term, the dollar will weaken as a result of the reaction to the reduction of tension and the general trend towards cooling of the US economy. Today, the ADP report on employment in the private sector will be published, which markets will focus on before Friday's nonfarm, the ISM report on the services sector will be released later, after a series of negative news, any deviation from forecasts can cause an excessively nervous reaction of markets and an increase in volatility.
EURUSD
The ECB before the next meeting on Thursday received an unpleasant surprise – inflation rose in May by 1.2%, which was worse than forecasts, the rate of price growth is minimal for the year, which means the probability of deterioration of forecasts following the meeting of the ECB has become slightly higher.
Today, the euro will participate in the positive win back, it is possible to increase to 1.1333, the passage of this level will improve the medium-term technical picture for the euro.
GBPUSD
Business activity in the UK manufacturing sector fell below the neutral level to 49.4 p in May, showing a minimum value for 34 months. The inflow of new orders decreased, exports fell at the fastest pace in the last 4.5 years, the second month in a row falls employment in production.
Almost the same trends in the construction sector, the fall of the index for the third month in a row, the weakest indicator in commercial construction, indicating an increase in concern about Brexit.
The decline in business activity is accompanied by a drop in consumer spending. Retail sales, according to RBC, fell by 3% in May, the maximum decline since 1995, the trend could jeopardize the situation in the main pillar of the British economy – the services sector.
Donald Trump, in his address to May, advised her to "stay to make a deal." Trump offers the UK to implement a tough exit scenario from the EU and at the same time promises to conclude a profitable trade agreement immediately after Brexit. As Trump is able to conclude profitable agreements, investors see well on the examples of Mexico and China, so his call is likely to remain without implementation – Britain needs good trade relations with the European Union, as the aggravation of existing trends will inevitably push the country's economy into a deep recession.
Nevertheless, short-term factors still support the growth of the pound. The first goal is 1.2736, at the end of the day, it is possible to increase to 1.2782/92, support 1.2703.
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