Quick Facts
- The EUR/USD rose to a multi-month high, with the euro gaining almost 1% on the day
- The British pound also strengthened, rising to its highest level since the UK’s decision to leave the EU
- The US dollar took a breather, with the EUR/USD and USD/CAD both moving higher
- Trade tensions between the US, Canada, and Mexico have been making progress, with a deal potentially being struck as early as tomorrow
- The global economy remains slow-growing, but still expanding
Risk Assets Make a Strong Recovery
Yesterday’s market plunge was a stark reminder of the uncertainty that lurks beneath the surface of global markets. But, as the saying goes, “when the market falls, they say it’s a buying opportunity.” And, indeed, risk assets staged a partial recovery today, breathing new life into investors who were nursing their wounds from the previous day’s losses.
The cause of the rebound? A combination of good news on the tariff front and a slew of positive economic indicators from around the world. First, the news from Washington: US Commerce Secretary Wilbur Ross hinted at a possible deal being reached between the US, Canada, and Mexico over tariffs, which sent ripples of optimism through currency markets. And, as we’ll explore later, this optimism hadn’t gone unnoticed by investors.
But before we get to that, let’s take a step back and look at yesterday’s market carnage. The Dow Jones Industrial Average plummeted 448 points, or 1.7%, while the S&P 500 fell 1.6%. The volatility was so intense that even the usually staid US treasury market joined in on the action, with yields on 10-year notes plunging to their lowest levels since 2017.
So, what changed overnight? In a word: leadership. Yesterday, US President Donald Trump took to the stage in Congress to defend his policies, including his contentious tariffs, against a barrage of criticism. While his remarks failed to calm the nerves of investors, they did help to remind the global community that the US is still a powerful player on the world stage.
And, as we mentioned earlier, trade talks between the US, Canada, and Mexico have been making progress. While no deal has been officially confirmed, Commerce Secretary Wilbur Ross’s comments that a resolution could come as early as tomorrow have helped to lift the cloud of uncertainty that has been hanging over markets.
Currency Markets
Now, let’s turn our attention to the currency markets, where the dollar has been on a tear of late. But, today, the greenback took a bit of a breather. The EUR/USD rose to a multi-month high, with the euro gaining almost 1% on the day. The British pound also strengthened, rising to its highest level since the UK’s decision to leave the EU.
So, what’s behind this sudden shift in sentiment? In our opinion, it’s a combination of factors. Firstly, there’s the trade war. While tensions between the US and its trading partners may never be fully resolved, yesterday’s rhetoric from Trump did hint at a possible thawing of relations. Secondly, the global economy is still growing, albeit at a slower rate than many would like. And finally, there’s the always-elusive optimism of investors, who are drawn to the prospect of a deal being struck.
Outlook
But, before we get too carried away, it’s worth noting that this recovery is far from without its risks. The trade war is still ongoing, and any false starts or setbacks could send markets tumbling once again. And, of course, there are still plenty of unknowns lurking in the shadows, from Brexit and its impact on the UK economy to the ongoing sluggishness in the Eurozone.
So, what can we expect from the markets going forward? In our opinion, the foundation for a sustained recovery is still out of reach. But, in the short term, we do expect the dollar to continue to take a backseat to other currencies, particularly the euro and the pound. We also expect trade tensions to remain a key driver of market sentiment, with any positive developments likely to send risk assets soaring.
And, finally, let’s not forget about the big picture. The global economy is still growing, albeit at a slow rate. And, even in the face of uncertainty, investors are still drawn to the simple fact that the US is a strong and powerful player on the world stage.
Forex Trading Summary:
- The EUR/USD rose to a multi-month high, with the euro gaining almost 1% on the day
- The British pound also strengthened, rising to its highest level since the UK’s decision to leave the EU
- The US dollar took a breather, with the EUR/USD and USD/CAD both moving higher
- Trade tensions between the US, Canada, and Mexico have been making progress, with a deal potentially being struck as early as tomorrow
- The global economy remains slow-growing, but still expanding
