Currency Note

Trump set to escalate trade battle

By Christopher Nye September 18th, 2018

The only release of note yesterday was the eurozone’s inflation rate for August, which came in as expected at 2%. However, there was plenty to talk about, particularly regarding the ongoing threat of a trade war and the potential impacts of a no-deal Brexit. It had been hoped that the US and China could come to an agreement which would ease fears of a full-blown trade war, but Trump put paid to that with yet another Tweet which renewed the threat of imposing $200 billion of import tariffs on Chinese imports.

Reports over the weekend appeared to suggest that Trump has already made the decision to impose a fresh wave of tariffs on Chinese goods. If the move goes ahead it would represent one of the severest economic restrictions ever imposed by a US president. The markets didn’t take too kindly to the news yesterday, with stocks and the dollar weakening as a result. The dollar’s loss was sterling and the euro’s gain, with the pound pushing through the $1.3150 barrier.

Meanwhile, Theresa May gave an interview to the BBC in which she said that she was confident of getting a Brexit deal based on the Chequers plan. The UK prime minister also said that the only alternative to the Chequers plan is to crash out of the EU without a deal – something the IMF’s managing director, Christine Lagarde, said would have ‘dire consequences’ on the UK economy.

For now, it appears that investors are confident the UK will agree a deal with the EU, but that could all change in an instant. It will be fascinating to see how this whole, prolonged situation plays out and what the eventual outcome is. Today is very quiet on the economic data front, but we can expect more fireworks regarding Trump’s threat and the prospect of a no-deal.

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GBP: no-deal Brexit poses recession risk

Even as expectations that the UK will agree a deal with the EU increase, we are still hearing of more and more negative impacts of crashing out of the EU without a deal. Moody’s said there was a risk of recession and now the IMF has had their say. Lagarde said that a disorderly exit from the EU would have dire consequences, including reduced growth, an increase in the budget deficit and a depreciation of the pound.

Still, May appears to be confident she can secure a deal with the EU and is on a charm offensive over the Chequers plan. She insists this is still the best way to secure a deal, with the alternative being a no-deal Brexit. As the deadline approaches, it is vital that something is agreed, but the government can’t appear to agree what the best way forward is.

Today is another quiet day for UK economic data, but tomorrow promises to be much busier, with the retail price index and inflation rate for August on Wednesday’s schedule. Analysts are forecasting that inflation will fall to 2.4% from 2.5% in the previous month. If that proves to be the case, it will show that the gap between wage growth and inflation is widening.

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EUR: inflation holds steady as expected

On a day dominated by the potential impacts of Brexit and Trump’s escalation of the trade battle with China, the inflation rate from the eurozone passed under the radar somewhat. Still, we’re here to report on the major economic releases of the day, so it is our duty to tell you that inflation fell to 2% in August from 2.1% the previous month. This was in line with expectations and nothing happened to the euro as a result.

The single currency traded sideways against sterling throughout the day, but it did manage to make some gains against the dollar which weakened following the trade war reports.

Like the UK, there isn’t much on the schedule today from the eurozone, although European Central Bank president, Mario Draghi will be delivering a speech this morning. Tomorrow we will see the eurozone’s construction output in July.

USD: trade battle looks set to escalate

Reports over the weekend suggest that Trump has already made up his mind to impose a fresh wave of tariffs on $200 billion of Chinese imports. There has been talk of these tariffs coming into force for weeks now, but it appears that the US will now press ahead with them. Many people are criticising Trump’s moves, because the extra costs of the goods will likely be passed on to US consumers, but Trump is resolute in his belief that these measures are good for the US economy.

The economic schedule in the US doesn’t really get going until Thursday, when we will see initial jobless claims up to 15 September 2018 and existing home sales for August. However, we have plenty to keep us occupied with the ongoing threat of a trade war and Brexit.

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