FX market outlook

FX market outlook

Posted on Tuesday, April 9 2019 at 8:22 am GMT+0000

US proposes tariffs on EU, but markets remain calm

– US officially proposes tariffs on EU, but market reaction minimal so far

– Euro advances, looks to ECB meeting tomorrow

– In Brexit, May will meet Merkel and Macron today ahead of EU summit

Lighthizer recommends tariffs on EU – new chapter in trade war?

The main story overnight was that the US Trade Representative, Robert Lighthizer, proposed introducing tariffs on a list of 11$bn worth of EU products in retaliation to EU aircraft subsidies. This is the clearest sign yet that once Washington wraps up a trade deal with Beijing, it will likely turn its gaze to Europe, whose economy is already struggling without a trade war. The timing is also consistent with Trump’s method of operation so far, of negotiating on ‘one front at a time’ (NAFTA, China, EU).

Brussels will likely respond to any US levies in kind, as it has previously, which implies that tensions could escalate rapidly once the US makes the first move. Yet, markets have taken the news in their stride. Futures tracking US stock indices are indeed pointing to a lower open today but only marginally, while in the FX market, commodity currencies like the aussie and kiwi are trading higher. Regardless, it wouldn’t be a surprise to see risk aversion return soon, as investors digest that the trade war theme will not vanish after any US-China accord.

Euro advances, but protectionism may keep Draghi cautious tomorrow

The euro outperformed its major peers on Monday, without any clear catalyst behind the move. Attention remains on the ECB policy decision tomorrow. No action is expected, so all eyes will be on Draghi’s remarks. European data have shown some tentative stabilization lately, though probably not enough to allay policymakers’ concerns around growth.

Meanwhile, the news that the US may impose tariffs on Europe soon are likely to reinforce concerns about protectionism within the ECB, providing yet another reason for Draghi & Co. to ‘stick to the playbook’ and strike a cautious tone.

UK’s May meets Merkel and Macron ahead of EU summit

The British Prime Minister will meet her German and French counterparts today, in an attempt to secure support for the Brexit delay she has requested – until June 30. Her visit comes ahead of the crucial EU summit tomorrow, where EU leaders will decide whether and how long of an extension to offer the UK.

Europe is highly unlikely to accept the UK’s June 30 request, and is likely to instead offer a longer extension, perhaps until year-end. If that is the case and PM May accepts, the pound could advance as the risk of a no-deal fades and expectations that the UK ultimately ends up with a closer relationship with the EU grow. Any signals that May could accept a customs union arrangement could have a similar market effect. In general though, for sterling to climb, a no-deal outcome on April 12 must first be taken off the table.