"Trump is playing the war card": a similar phrase can illustrate the events of recent days. However, we are still talking about a trade and diplomatic war, which, in fact, has been going on for years. But recently, the political conflict between the United States and China has increasingly acquired a "commercial" color. The market reacts accordingly: protective assets (yen, gold, franc) grow in price, the dollar continues to lose its position. Previously, the US currency was also used as a safe haven currency, but now the situation has changed: the greenback is under the weight of its own problems, including domestic political ones. Therefore, the buyers of the EUR/USD pair also get their benefit in this case. Here, the pair's growth is due only to the dollar's weakness, but this is quite enough for the bulls to keep the situation under control.
What happened?
The trade conflict between the US and China has been going on for several years – almost as long as Trump has been in charge of the White House. The months-long talks were repeatedly disrupted, rescheduled, and resumed again. As a result, the parties agreed on the first phase of the trade deal in the fall of 2019, thus preventing the development of a trade war. Washington has pledged not to impose so-called "December duties" on Chinese imports worth $160 billion a year. Beijing, in particular, has pledged to increase the volume of purchases of American goods. A kind of "thaw" occurred in relations between the United States and China, which lasted until the coronavirus pandemic. To be more precise, relations between the superpowers finally soured when the Americans accused the PRC of spreading COVID-19 – US President Donald Trump now calls the coronavirus nothing less than"the Chinese plague".
Since then, Beijing and Washington have been exchanging recriminations and accusations of various kinds. For example, in late July, US Secretary of State Mike Pompeo accused China of spying and stealing American intellectual property, demanding the closure of the Chinese Embassy in Houston. A little later there were also retaliatory measures from the PRC: Beijing has demanded to close the US Embassy in the Chinese city of Chengdu.
Despite political differences, the parties are fulfilling the terms of the trade agreement - or rather, the first part of this deal. Therefore, traders hoped that in spite of loud conflicts, negotiations on the second part of the trade deal would take place as usual. There were certain prerequisites for this: for example, a video conference was planned for this Saturday, during which the negotiators had to outline the trajectory of further prospects. But the video conference did not take place: it was postponed "for an indefinite period" without explanation.
This turn of events disappointed dollar bulls. The fact is that the most difficult and strategically important issues will be discussed by the parties precisely within the framework of the second phase of talks (if they take place at all). According to some reports, the Chinese are counting on a change of power on the American political sphere. Trump has repeatedly put pressure on the PRC, threatening to tighten the terms of the deal if he is re-elected. Many forgot about this circumstance, as the representatives of the Democrats, according to polls, bypassed the incumbent president. In early summer, Biden was ahead of Trump by about 15%, amid the coronavirus crisis.
But the latest ratings no longer speak of Joe Biden's unequivocal leadership. According to the latest polls, Biden's rating is on average at 49% in 15 key states of the country, while Trump's rating is 48%. Trump has significantly reduced the lead over his opponent, and this fact has alarmed many investors. Especially against the backdrop of the strengthening of anti-Chinese rhetoric on the part of the US president.
For example, Trump today admitted that, following ByteDance, which owns the TikTok service, other Chinese companies operating in the United States may be at risk. When asked by journalists about whether the authorities plan to impose restrictions on Alibaba, the Trump did not rule out such an option, adding that his administration is "considering such a scenario." In addition, the United States expanded sanctions against Chinese Huawei: Washington imposed restrictive measures against 38 subsidiaries of this company. The Department of Commerce has also extended the amendments under which foreign companies using US-made chip-making equipment must obtain a US license before supplying certain chips to Huawei.
The announced sanctions are just the tip of the iceberg. Before that, there was the Hong Kong issue, sanctions for oppressing Uighur rights in China, coronavirus charges, and charges of espionage.
That is, on the one hand, Trump is strengthening anti-Chinese rhetoric, and on the other hand, he is strengthening his position in the US electoral field. And all this just three months before the presidential election. The news of the disrupted US-Chinese talks was an eloquent illustration of the situation.
How to trade?
The main beneficiaries of investor anxiety were the yen, the franc and gold. The euro-dollar pair is growing only due to the dollar weakening. Compare, for example, the dynamics of USD/JPY and EUR/USD. Actually, it is difficult to call it growth – the European currency only stays above the resistance level of 1.1810 (the Tenkan-sen line on the daily chart). Theoretically, this allows EUR/USD bulls to approach the nearest resistance level of 1.1900 and the main resistance level of 1.1940 (the upper line of the BB indicator on D1). Buyers still do not have enough news momentum for a price jump, while the dollar's sluggishness will not go far - even to the borders of the 19th figure. But all the prerequisites for the pair's growth are there – at least in the context of testing the 1.1900 mark. Therefore, long positions on EUR/USD remain a priority in the medium term.
The material has been provided by InstaForex Company - www.instaforex.com