- Markets remain in risk-off mode ahead of tariff decision tonight
- Risks seem tilted towards escalation, but it’s a close call
- Dollar eyes remarks by Fed Chair Powell and PPI data
Yen extends gains as nervous markets await tariff decision
Market sentiment remains fragile on Thursday as the prospect of further escalation in the US-China trade conflict continues to dampen the appeal of riskier assets, leading investors to seek shelter in safe havens. Indeed, the Japanese yen outperformed all its major peers yesterday and remains in the driver’s seat today. Meanwhile, US stocks staged a comeback to close only modestly lower, with a little help from President Trump, who said the Chinese VP is coming to the US ‘to make a deal’. That said, futures are pointing to another negative open today.
The moment of truth is near, as the Chinese delegation has arrived in Washington and the talks resume today. As things stand, the US will raise its existing tariffs at midnight US time (04:00 GMT on Friday), unless China offers enough concessions to appease the American negotiators. It’s a close call, but risks seem tilted towards escalation. China could make compromises, but those are unlikely to be enough to satisfy hawks like chief negotiator Lighthizer, not least because Beijing doesn’t want to lose face by completely yielding to US demands.
If that call proves correct, stocks will likely plunge alongside commodity currencies such as the aussie and kiwi, as uncertainty skyrockets and investors brace for China’s retaliation. The main beneficiary will probably be the yen. On the contrary, if the two sides find common ground and avoid raising tariffs, the opposite reactions will likely ensue. One way or another, markets are in for a ride tonight.
Dollar eyes Powell’s remarks and PPI data
The dollar has gone nowhere this week, trading practically flat against a basket of six major currencies. What’s striking is that market expectations for a Fed rate cut have grown once again, with the implied probability for a cut by December rising back to ~75%, yet the US currency has remained resilient. While not obvious, it seems the greenback is attracting safe-haven flows amid mounting trade tensions, helping it to stay afloat even despite an increasingly clouded monetary policy outlook.
Hence, the world’s reserve currency could also be impacted by the tariff decision overnight, but before then, traders will tune in to hear from Fed Chairman Jay Powell at 12:30 GMT. Regional Fed presidents Bostic (14:45 GMT) and Evans (18:15 GMT) will also deliver remarks. On the data front, US producer prices for April are due, ahead of the all-important consumer price figures tomorrow.
