Market moving numbers: 12th November – 16th November 2018:

New Federal Reserve Chairman, Jerome Powell's statement which indicated that there might be a possibility of as many as four interest rate hikes out of the Federal Open Market Committee (FOMC) to take place this 2018 has most certainly rattled markets, specially with the growing anti-trade sentiments which shrouds over the United States (U.S) economy. While the U.S FOMC raised rates for the third time this year in September as expected, markets showed a strong buy on rumour, sell on fact’ move as traders are seen to unwind their long U.S Dollar (USD) positions as soon as the FOMC decision took place. The U.S Dollar Index (DXY) recovered from its post-midterm election slide rose to close at 96.90 last Friday after the Federal Reserve’s kept its monetary unchanged on Thursday, but signaled further gradual rate hikes in the future. Nonetheless, the team here at EssenceFX will continue to track the implications of growing anti-trade sentiments and the effects it brings on the overall USD given that the U.S. and China are now fully engaged in a $360 billion trade war with threats to expand further.

On September 24, the FOMC voted to increase its benchmark interest rates by a quarter of a percentage point to a range of 2.00% to 2.25%. While this move was largely anticipated, the team here at EssenceFX notes on the sustenance in the USD's strength as reflected by the DX which goes against the typical 'sell on fact' move usually seen. This strongly indicates that markets maintain a generally hawkish sentiment in regards to the USD and are pricing in for one more rate hike in December, which would then bring the total number of rate hikes to four in 2018 though this move is being criticized by Trump as being too aggressive. Whilst, the outlook is less uncertain for now with trade tensions escalating, the USD is expected to rise further on the view that U.S. inflation pressures will pick up as the conventional wisdom is that, any escalation in trade conflict between the U.S. and its trading partners will feed through to inflation.

Politically, U.S. trade representatives and Japan’s economy minister has begun second round of trade talks in which Japan wants to stop import tariffs on its cars and fend off U.S. demands for a free-trade agreement, while considering lowering tariffs on U.S. agriculture in exchange for avoiding higher auto tariffs. Also, while the meeting between Trump and European Commission chief Jean-Claude Juncker which took place in Washington on July 25 to discuss the trade conflict seemed to have fared well with Trump reporting that he and Juncker had agreed to work to lower the industrial tariffs on both sides and to increase European imports of liquified natural gas and soybeans from the U.S., among other measures, both sides are still in exploratory talks on how they can pursue a limited trade agreement, with no real negotiations yet started. The markets remain worried about the heated dispute between the U.S. and China which has been propelled in part by widening bipartisan support among the Democrats and Republicans for the need to confront China on Chinese trade and intellectual property practices. Bloomberg news have reported that Washington was preparing to announce tariffs on all remaining Chinese imports by early December if talks between Trump and President Xi at the Group of 20 leaders summit in Argentina at the end of November fail to ease the trade war. Trump had already imposed tariffs on US$250 billion worth of Chinese goods and then threatened more levies if China retaliated, to which China did by imposing retaliatory duties on US$110 billion worth of U.S. goods. Trump has also made good on several months of threats and authorized tariffs of 25% on Canadian steel imports and 10% on aluminum in June, hence resulting in Canada imposing tariffs against U.S. exports and disputing the 232 tariffs on steel and aluminum before the World Trade Organization (WTO) in retaliation to the U.S. tariffs on steel and aluminum. Though at that time, Trump had tweeted that tariffs would only come off if a new and fair NAFTA agreement is signed, Trump’s tariffs on steel and aluminum will remain in place despite the new U.S.-Mexico-Canada Agreement (USMCA) trade pact with Mexico and Canada. Nonetheless, Mexico and Canada have recently said ahead of the USMCA signing ceremony planned for November 29 or 30 that they will not sign the new USMCA unless the U.S. removes steel and aluminum tariffs its two continental neighbour. Also, the U.S. steel and aluminum tariffs have attracted seven requests for WTO adjudication as well as a range of criticism, at a fractious WTO dispute settlement meeting, while the U.S. hit back with legal actions against its critics. This tariff dispute signals an escalation in global trade tensions. A decline in U.S. financial markets could be an impact that could occur as the trade wars escalates.

In regards to global politics, it has been four months since the meet up between Trump and North Korean President Kim Jung-un in Singapore which resulted in a signed joint statement that committed both sides to establishing new relations and a path to peace on the Korean Peninsula. While the Singapore summit, where Trump and Kim agreed to work towards the complete denuclearization of the Korean Peninsula, has since been criticized for a lack of detail on when or how Pyongyang would renounce nuclear weapon, Trump expected to hold a second summit with Kim after the U.S. congressional elections in November to continue their efforts to build out a pathway for denuclearization. Ahead of Secretary of State, Mike Pompeo’s recent meet with senior North Korean official, Kim Yong Chol, last Thursday to discuss North Korea’s denuclearization, the Chairman of the Joint Chiefs of Staff, General Joseph Dunford, said the U.S. military remains ready to respond to any threats from North Korea but stressed its main role is to support the diplomatic process with North Korea. This latest move in the diplomacy with Pyongyang could translate to a negative for gold in the weeks to come, causing the commodity to fall even further this week to the 1,209.63 level.

This week, the monthly U.S. Consumer Price Index (CPI) will be one of the most important indicators monitored by foreign exchange traders. The release and revisions of the CPI figure by the Bureau of Labor Statistics can produce swings in the USD's value to other foreign currencies. While a low inflation does not guarantee a favorable exchange rate for a country, but an extremely high inflation rate is likely to impact a country’s exchange rates with other nations negatively.

The currently uncertain Brexit negotiation continues to provide an uncertain outlook for the Great Britain Pound Sterling (GBP) as traders continue to decipher whether Britain can avoid a no-deal Brexit when it leaves the European Union (EU) in March 2019. Though Brexit talks had remained at an impasse over the Irish border disagreement, the latest Brexit optimism stemming in part to the new British proposals for resolving the disagreement over the future of the Irish border and on reports that the U.K. and the EU have agreed to a deal that would give U.K. financial services companies access to EU markets after Brexit had seemingly placed GBP on a firmer footing. Nonetheless the GBP fell slightly last week on a remark by a Democratic Unionist Party lawmaker that the U.K. is heading toward leaving the EU without a deal though the GBP rose on reports that Britain is preparing for a Brexit agreement by the end of November. Hence, the GBP/USD exchange rate rally could also be affected by any further remarks about Brexit. The GBP is poised to strengthen should a deal be struck and could similarly suffer a sell-off if the talks break down.

Prices of cryptocurrency continue to spiral downwards. Bitcoin remains locked in a bear market that is unlikely to let up anytime soon. Recent price data has shown weaker rebounds and lower highs for the digital currency, which means investors can expect downside pressure to persist. In a related perspective, several recent developments have also caused us to reassess our longer term take on gold for one; the announcement of blockchain moving into the financial mainstream with IBM's dealings with certain European banks and the continued hype in cryptocurrency with more mainstream players jumping in especially post heavier support from colossal entities such as the International Monetary Fund (IMF). In some instances, it does lead us to question whether the IMF 'intentionally' offloaded so much of their holdings of gold onto China. Nonetheless, the team will continue to closely monitor the developments of competing Gen Z favouring currency alternatives vis-a-vis the typical age long established Gen X favored safe haven to provide you with a better overview. One strong view the team has moving along this 2018 is that falls in cryptocurrencies has somewhat led to the increase in gold prices, indicating to us a growing tendency of crypto holders to cash out their holdings in crypto and switch to the age old safe haven (gold) for protection of value.

In relation to our highlighted 'populist movement' and the psychological effects it continues to bring upon our modern day society, the team here at EssenceFX would like to reiterate based on what happened in the recent United Kingdom (U.K) general elections (GE); there are a large mass of U.K citizens which demand for a change of leadership in the country. With U.K as a precedent, it intrigues us to also reflect on the surprises the recently announced German General Elections has brought about, with the far right Alternative for Deutschland (AfD) party gaining strong momentum; resulting to their entry into parliament. In regards to recent 2018 Italian Elections, we witnessed more unexpected scenario's just as formerly opined by the team here at EssenceFX with the anti-EU Five-Star Movement which shocked markets by taking more than 30% of the tally. The more 'populist' or 'Eurosceptic' parties in our opinion has potential to place renewed and substantial pressure on the Euro (EUR) as they move to table their respective policies. The team here at EssenceFX will track this potential pressures in the EUR in the weeks to come. Mexico saw Andres Manuel Lopez Obrador winning its presidential election, hence setting the stage for a government that will inherit the NAFTA negotiations with Canada and the U.S., which have been stalled for several months after Canada and Mexico could not keep up with the U.S. administration’s demands, particularly that 75 percent of all car parts be sourced from the three countries in order to qualify for tariff exemptions. Nonetheless, after renegotiating NAFTA for more than a year, the Mexico and the U.S. announced a bilateral trade pact on August 27 while the U.S. and Canada managed to forged a last minute deal on September 30 to salvage NAFTA as a trilateral pact with Mexico known as the U.S.-Mexico-Canada Agreement. Following the U.S mid-term elections on November 6th which resulted in a divided Congress, in which the Democrats seized control of the U.S. House of Representatives and the Republicans keep the Senate, the U.S. dollar is likely to remain neutral as Trump would have a great difficulty in passing through additional fiscal stimulus measures and infrastructure spending that may otherwise provide an additional boost to the U.S. economic activity.

Nonetheless for the case of the Europeans, a recent update the team of us view which adds pertinent to the strength to the Euro is that the French Finance Minister Bruno Le Maire stated that he wanted to create a single economic zone to “rival China and the US” as many countries on the continent emerge economically. In our view, the “deepening of economic and monetary union” objective is a difficult one to achieve as there is much public opposition to the idea of a superstate. Nonetheless, deepening global competitiveness as well as positive numbers out of Europe as of late could ignite some fresh considerations in regards to the matter.

In conclusion of this week's write-up, we would like to once again bring your focus back to the bigger picture as we close off with this question: "Will the U.S still hike Interest Rates this year?" Since the answer currently remains as somewhat 'more certain' (post Fed Powell's statement), we urge you to pick out on early trading signals to "buy on rumor and sell on fact" as currency majors have been following this trend so far, moving along 2018.

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