FOMC minutes confirm further rate hikes, new tariffs on China kick in

Summary:

• FOMC minutes confirm that further gradual rate increases seem to be warranted
• US tariffs on Chinese goods kick off at the midnight, China has yet to react to US levies
• Asian stocks recover, Antipodean currencies move up, USD steadies

Over the past hours we got a lot of crucial reports substantially impacting both currencies as well as stocks. Beginning with the FOMC minutes one may stress that we got a confirmation that the Committee should continue delivering gradual rate increases given that the economy remains very strong and inflation is estimated to run at 2% on a sustained basis over the medium term. The minutes of the Federal Open Market Committee admitted that external risks had intensified around trade policy, but even so interest rates were expected to be lifted in a gradual manner. Discussions with regard upside risks to inflation (so-called overheating risks) were also brought up, and officials decided to claim that was "premature to conclude that the Committee had achieved its price target" whereas others expressed their concerns saying that "a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn". The overall tone of the minutes was USD slightly positive, but all in all the response was really tepid.

The US dollar index (USDIDX on xStation5) is stubbornly hovering below its critical resistance signalling bulls’ fatigue. That said, one may still suspect the index to go lower from the current levels unless a 95.00 handle is durably broken. Source: xStation5

Moving on, one needs to mention US tariffs which kicked in at the midnight, in line with earlier announcements coming from Donald Trump’s administration. New duties encompass goods worth $34 billion. Moreover, US President suggested that further $16 billion tariffs should be implemented within two weeks threatening to extend them to all $500 billion of goods imported from China. Earlier this week Beijing has signalled that it will promptly retaliate with the same amount of tariffs albeit there has been no reactions from there as of yet. In this case no news is good news suggesting that a tit-for-tat approach could be changed, chances for such a scenario do not seem to be particularly high though. Either way, Asian equity markets appear to say "so far so good" rising notably and at least in part erasing their previous heavy losses. As for now it seems that further steps taken by the authorities in Beijing seem to be critical, and if China backed away from a further trade war escalation, it would mean a possible watershed in the trade spat resulting in a reprieve for many classes of assets including soft commodities.

As of 6:53 am BST the Shanghai Composite is rising 0.9%, the Japanese NIKKEI (JAP225) is adding 1.4% while the Hang Seng (CHNComp) is going up 0.9%, and the SP500 future are pointing to a positive opening rising 0.2%. On the currency front high-beta currencies such as AUD and NZD are standing out the most showing a decent 0.35% gain each. In turn, the euro is trading slightly above 1.17 nearing its crucial medium-term technical levels at 1.1740 and 1.1850.

Has a tipping point been already achieved? Technically the Japanese NIKKEI could look encouragingly given the yesterday’s bullish candlestick. Having said that, the jury is still out to claim the end of the ongoing downward move, and the major attention needs to paid to 21900 points where sellers could become more active again. Looking broader, a possible end of the current downward pullback might be sought in the neighbourhood of the blue trend line. Source: xStation5