AUD tumbles amid weak inflation data
On Wednesday morning, all G10 currencies extended gains against the US dollar, with the exception of the Australian dollar after inflation data fell short of expectations. The Aussie fell as much as 0.75% against the buck as AUD/USD slid to $0.74. Headline CPI printed at 2.1%y/y in the second quarter versus estimate of 2.2% and 1.9% in the previous one. The trimmed mean measure – a gauge of core inflation – held stable at 1.9%, while the weighted mean CPI eased to 1.9%y/y, down from 2.1% in the first quarter.
Lately, the Aussie has been under heavy selling pressure amid escalating trade war between the US and China. Indeed, China is Australia’s largest trading partner with more than 36% of its exports going to the world’s second largest economy. In view of the ongoing uncertainties, it looks like the Aussie is doomed to trade below the $0.75 support area, as speculators have no reason to develop a bullish view on the currency. Nevertheless, the $0.73 support seems to be holding out (has not been broken since May 2017), which suggests that AUD/USD will most likely continue to tread water between 0.73 and 0.75.
Trade war: Juncker visits Trump
Starting today, European Commission President Jean-Claude Juncker and Donald Trump will be holding talks in Washington related to current trade battle between both blocs. As a reminder, the US announced early March tariffs measures of 25% and 10% on steel and aluminum for its trading partners while the EU retaliated by imposing tariffs on popular US goods for a total of USD 3.2 billion. Both trade sanctions are currently effective. Following EU retaliation, Trump threatened to impose further tariffs of 20% on EU imported vehicles, a step that would impact a total of USD 58.2 billion of auto products. The EU says it is currently drawing up a new list of products it could potentially tax in retaliation.
Contrarily to Trump’s complaint about unfair trade practices, it appears that average tariffs between both partners remained historically low, at 3%, while EU goods trade surplus to the US of USD 150 billion (USD 101 billion incl. services) confirms that the US economy is in good shape rather than being related to a bad trade deal.
Therefore, today’s trade talks remain crucial for both blocs, as further tariffs measures are underway. However, the odds of both parties finding a common agreement that is deemed to be fair is rather low, as EU diplomats are rather less optimistic. The first meeting is expected to remain a first exchange of primary views above all.
EUR/USD sideways price action started in 23. July 2018 along 1.1690 is maintained for the time being. We expect current trend to change tomorrow during ECB’s monetary policy decision, which should push the pair to the upside.
