GBP/USD: Dollar Soars As Trump Threatens China Tariff Increase

The euro advanced 0.5% across the previous week as investors cheered progress in the US — China trade talks. The pair rallied to a 4-week high of US$1.1064, before closing the week at US$1.1042. The euro is easing versus the dollar in early trade on Monday.

Despite weak German data fuelling recession fears in the previous week, the euro advanced. A broad risk on sentiment boosted the common currency thanks to progress in Brexit talks and US — China trade deal developments. Investors were able to shrug off weaker data on the basis that a resolution to Brexit and the ongoing US — Sino trade dispute could prevent a euro wide economic downturn.

As the new week kicks off euro traders have plenty to be watching. Firstly, any further developments in US — Chins trade relations will be eyed closely. Euro investors will also look towards EU — US trade relations as the EU makes a last ditch appal to the US to refrain from triggering retaliatory tariffs over illegal subsidies to Airbus.

On the economic calendar, investors will also be looking towards the release of eurozone industrial production. Analysts predict that industrial production increase 0.3% month on month in August. The stronger reading could lift the euro, easing recession fears and fears of further monetary easing from the European Central Bank.

Geopolitics Remain In Focus In Data Quiet Start To Week

The dollar slipped lower across the previous week as improved US — China relations meant that investors were no longer seeking protection from safe havens such as the US dollar. The two economic powers met for the 13th round of trade talks in Washington at the end of last week. They agreed a limited trade deal. The US will hold off from raising tariffs on Chinese products this week, in exchange for some Chinese concessions. Political analysts expect the text of the deal to be finalised over the next five weeks ahead of a potential summit between Trump and Chinese President Xi Jinping in Chile.

Last week the Federal Reserve released the minutes to their latest meeting. The minutes repeated the well-known messages failing to add anything new.

On the data front, things look relatively quiet at the start of the week, meaning geopolitics will remain in focus. Investors will also look ahead to Wednesday’s retails sales.

What do these figures mean?
When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.

For example, it could be written:

1 EUR = 1.12829 USD

Here, €1 is equivalent to approximately $1.13. This specifically measures the euro’s worth against the dollar. If the U.S. dollar amount increases in this pairing, it’s positive for the euro.

Or, if you were looking at it the other way around:

1 USD = 0.88789 EUR

In this example, $1 is equivalent to approximately €0.89. This measures the U.S. dollar’s worth versus the euro. If the euro number gets larger, it’s good news for the dollar.

Why do interest rate cuts drag on a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Lower interest rate environments tend to offer lower yields. So, if the interest rate or at least the interest rate expectation of a country is relatively lower compared to another, then foreign investors look to pull their capital out and invest elsewhere. Large corporations and investors sell out of local currency to invest elsewhere. More local currency is available  as the demand of that currency declines, dragging the value lower.


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