Trade War Fears Rising Geopolitical Tension and Dovish Draghi

The FTSE climbed steadily through the morning session, supported by the heavyweight miners. The likes of Anglo American, Glencore and Antofagasta dominated the upper reaches of the FTSE, following solid industrial production data from China overnight. However, the FTSE reversed most of its gains as Wall Street opened in negative territory

Markets calm to rising tension between Russia & Britain

Geopolitical risk was once again on investor’s minds as relations between UK and Russia sour rapidly. The market reaction has been fairly muted so far, with some increased buying into 10-year gilts, bringing yields lower, a reflection of investors taking risk off the table. However, the markets have not seen increased flows out of riskier assets and traditional safe haven gold is actually trading lower, suggesting that for now the markets are not overly concerned with Prime Minister Theresa May’s decision to expel 23 Russian diplomats and terminate high level contact with Russia, in retaliation to the Salisbury poisoning.

Dovish Draghi talks down the euro

In the forex markets EUR/USD was a standout faller across the day after ECB President Draghi managed to talk down the euro again. Just a week after dovish Draghi managed to slash 200 points from EUR/USD, he was up to his old tricks again, highlighting the strength of the euro as a potential problem for the already sluggishly low inflation in the eurozone. Draghi once again made himself perfectly clear that the central bank must see further evidence of inflation moving towards the central bank’s 2% target, before monetary policy will be tightened. We continue to see Draghi play it very safe, avoiding spooking the bond market.

Dollar rallies despite 3 monthly declines in retail sales

Meanwhile the dollar was moving higher on Tuesday despite the weaker than forecast retail sales. US retail sales printed at 0.1% in February, in line with an upwardly revised -0.1% in January, but well off estimates of 0.3%. This was the third straight month of falling retail sales, pointing to a slowdown in growth in consumer spending. Whilst this data won’t prevent a rate hike in March from going ahead nor will it impact on the Fed’s pace of rate hikes going forward. However, it will certainly raise some eyebrows at the Fed – rising interest rates and consumers holding back on spending is not a desirable combination.  

By and large, investors ignored retail sales figures to focus on the much more encouraging PPI figures. Whole sale inflation jumped to 2.7% year on year, its biggest gain since August 2014. High PPI often translates into higher consumer inflation later on. This was enough to boost the dollar, which traded 0.18% higher versus a basket of currencies as it looks to target the key psychological level of 90.00

EUR/USD under pressure

Dovish Draghi and strong US PPI has pushed EUR/USD to $1.2358, as it hovers near the low of the day. With no high impacting eurozone data due until Friday, the euro could struggle to find reason to move higher. A meaningful break through support at $1.2320 could open the doors to $1.23. On the upside EUR/USD would need to move above its daily high of $1.2412 to extend gains to resistance at $1.2445.