BY Lukman Otunuga
A tidal wave of risk aversion engulfed financial markets on Friday after President Donald Trump announced that the US will impose tariffs on up to $60 billion of Chinese imports.
This bold and frightening move by Trump has already triggered retaliatory actions from China, who fought back by disclosing plans to impose tariffs on up to $3 billion of US imports. With fears likely to heighten over a trade war negatively impacting global growth, risk aversion could become a dominant market theme moving forward.
Escalating trade tensions between China and the US have exposed global equity markets to significant downside risks. Asian stocks suffered severe losses this morning, following Wall Street’s gut-wrenching declines overnight.
The negative sentiment from Asian markets could contaminate European shares and trickle down to Wall Street. With the Dow Jones Industrial Average closing more than 720 points lower on Thursday amid trade war fears, US equity bears could attack once again this afternoon.
Sterling slips post-BoE meeting
Sterling sharply appreciated against the Dollar before abruptly surrendering gains on Thursday, after the Bank of England kept its interest rates unchanged at 0.5%.
Although monetary policy remained unchanged in March, a key takeaway from the meeting was the 7-2 split vote, which was seen as hawkish. The agreement on a Brexit transition deal with the EU and signs of wage growth acceleration are likely to boost expectations of a rate hike in May.
There is a possibility that Sterling’s current weakness could be thanks to the BoE expecting the economy to take a ‘temporary hit’ from the recent severe weather conditions. With the Pound highly sensitive to monetary policy speculation, expectations of higher UK interest rates could offer some support further down the road.
Taking a look at the technical picture, the GBPUSD has found itself under pressure, with prices trading around 1.4110 as of writing. A daily close below 1.4100 could encourage a decline back towards 1.4000. Alternatively, if bulls can defend 1.4100 then prices could challenge 1.4180.
Yen gains on risk aversion
The Yen proudly marched to a 16-month high against the Dollar on Friday, as traders frantically sought safety in safe-haven assets amid growing fears of a global trade war.
With uncertainty likely to heighten as trade tensions escalate, the Yen may remain a risk-averse trader’s best friend. Taking a look at the technical picture, the USDJPY is under intense pressure on the weekly charts with prices trading around 104.70 as of writing. A solid weekly close below 105.50 could invite a decline lower towards 104.00.
Commodity spotlight – Gold
Gold bulls were back in action on Friday with prices venturing towards $1340 thanks to a vulnerable dollar and a sell-off in global equity markets.
It has certainly been an incredible trading week for the yellow metal, as heightened fears of a global trade war accelerated the flight to safety. With risk aversion in the air and the Dollar under pressure, Gold has the potential to appreciate further.
From a technical standpoint, Gold could challenge $1355 if bulls are able to secure a weekly close above the $1340 level. Alternatively, a failure for bulls to secure control above $1340 could encourage a decline back towards $1330.
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