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• Risk aversion engulfs markets after US unleashes more trade havoc
• Dollar holds its ground even as Fed easing bets grow further
• US PCE inflation, German preliminary CPIs, and Canadian GDP due today

Yen soars, loonie & peso crumble as Trump fires another tariff salvo

Following a relatively calm session yesterday, risk aversion returned with a vengeance early on Friday, after the US President announced new tariffs overnight. All goods coming to the US from Mexico after June 10 will be subject to a 5% tariff, which will increase to 25% by October, “until such time as illegal migrants coming through Mexico, and into our Country, STOP”, Trump said on Twitter.

Markets reacted sharply, as the news caught everyone off guard, with investors piling into safe-haven assets like the Japanese yen and gold. On the opposite side of the ‘risk’ spectrum, futures tracking the major US stock indices are pointing to a lower open today, while the Mexican peso is getting pummeled. The loonie is also suffering, as investors bet that this escalation will effectively derail the new NAFTA agreement and thus harm Canada in the process.

This is even bigger than it looks at first glance. So far, Trump tried to fight trade battles on one front at a time, while also staying mindful of the potential damage to stock markets. Both of these seem to have changed, with the President now placing more emphasis on pleasing his voting base as the 2020 election race draws nearer. Overall, traders still seem to be underappreciating the disruption these skirmishes can cause both to business supply chains and consumption. As such, risk aversion could remain the dominant theme in the near term, with any retaliation from Mexico or China likely to unleash more havoc in markets.

Dollar stands tall despite Fed easing bets, looks to inflation data

The greenback is lower today against a basket of six major currencies, albeit only slightly, as the darkening trade picture is fueling bets that the Fed will intervene to support the economy by easing monetary policy. A full rate cut by December is fully priced in and the probability for a second one soared has to ~80%, from roughly ~50% earlier, according to pricing derived from the Fed fund futures.

Some cautious remarks by Fed Vice Chair Clarida yesterday that cuts are possible if the outlook deteriorates may have contributed as well, alongside a disappointing Chinese manufacturing PMI overnight. In the big picture, the weakness in the dollar has so far been almost negligible despite the sharp drop in long-term US interest rates, which once again highlights the lack of appeal in other major currencies. In this sense, it’s worth noting that German bund yields have also fallen to almost record low levels today, taking some shine off the euro as well.

Today, the core PCE price index is due, together with personal income and consumption, all for April. Projections point to an unchanged yearly PCE rate of 1.6%, but the risks around that forecast may be tilted towards a disappointment.

German inflation and Canadian GDP also eyed today

Besides any developments in the trade saga and the US data, traders will also keep an eye out on Germany’s preliminary inflation numbers for May today, ahead of next week’s ECB meeting.

In Canada, GDP figures for Q1 are due, but given the overnight news, even a strong positive surprise may be unable to support the loonie for long.

The pair dipped below 109 handle in early Friday's trading, for the first time since late Jan.

Escalation of trade war on the latest decision of US administration to impose tariffs on all goods from Mexico, sparked fresh safe-haven demand and pushed yen to new multi-month highs, with strong technical signals of possible further advance of yen adding to improved sentiment.

Thursday's strong upside rejection (spike high was left at 110.92 after the action was capped by falling 20SMA) and subsequent bearish acceleration, generated bearish signal on formation of bull-trap pattern on daily chart. Also, final break below the floor of four-day congestion and extension below key support at 109.02 (13 May low) adds to negative signals for continuation of downtrend from 112.40, which require confirmation on weekly close below this level.

Fresh bearish momentum is building and adding to negative signals from daily MA's in full bearish configuration, with thick weekly cloud also pressuring. Bears eye immediate target at 108.50 (31 Jan low/Fibo 50% of 104.59/112.40 rally) with deeper fall expected on break here.

Broken former low at 109.02 now marks initial resistance, followed by broken Fibo 38.2% support at 109.41) with converged falling 10/20SMA's (109.67/79) expected to cap extended upticks and maintain bearish bias.

Res: 109.02, 109.41, 109.67, 109.79
Sup: 108.78, 108.50, 108.00, 107.57

EUR/USD

Current level - 1.1131

The pair struggles above 1.1110 low and a violation of that area is to be expected, for a slide towards 1.1015. Initial resistance  is projected at 1.1160.

USD/JPY

Current level - 108.89

The intraday peak at 109.90 sets the beginning of a new wave downwards, to 107.70

GBP/USD

Current level - 1.2631

The slide through 1.2600 low signals a bearish bias, for a continuation towards 1.2506 target area. Initial minor resistance lies at 1.2650.

Pivot (invalidation): 109.50

Our preference Short positions below 109.50 with targets at 109.00 & 108.80 in extension.

Alternative scenario Above 109.50 look for further upside with 109.70 & 109.95 as targets.

Comment The break below 109.50 is a negative signal that has opened a path to 109.00.

Pivot (invalidation): 1.2620

Our preference Short positions below 1.2620 with targets at 1.2600 & 1.2580 in extension.

Alternative scenario Above 1.2620 look for further upside with 1.2640 & 1.2660 as targets.

Comment The upward potential is likely to be limited by the resistance at 1.2620

Pivot (invalidation): 1.1145

Our preference Short positions below 1.1145 with targets at 1.1125 & 1.1115 in extension.

Alternative scenario Above 1.1145 look for further upside with 1.1160 & 1.1170 as targets.

Comment The index currently faces a challenging resistance area at 1.1145.

Pivot (invalidation): 5.9360

Our preference Short positions below 5.9360 with targets at 5.8650 & 5.8250 in extension.

Alternative scenario Above 5.9360 look for further upside with 5.9700 & 6.0080 as targets.

Comment Even though a continuation of the technical rebound cannot be ruled out, its extent should be limited.

Pivot (invalidation): 0.6920

Our preference Short positions below 0.6920 with targets at 0.6900 & 0.6880 in extension.

Alternative scenario Above 0.6920 look for further upside with 0.6935 & 0.6950 as targets.

Comment The upward potential is likely to be limited by the resistance at 0.6920.

Daily Pivots: (S1) 137.94; (P) 138.34; (R1) 138.63; More...

GBP/JPY's fall extends to as low as 137.21 so far. Current decline from 148.87 should now target to retest 131.51 low. On the upside, break of 138.73 minor resistance will turn intraday bias neutral and bring consolidations first, before staging another fall.

In the bigger picture, current development suggests that GBP/JPY was rejected by 149.98 key resistance. And medium term fall from 156.59 is still in progress. Break of 131.51 will target 122.36 (2016 low). On the other hand, decisive break of 149.98 should confirm that medium term fall from 156.59 (2018 high) has completed at 131.51 already. Further rally would be seen back to 156.59 resistance and above.

Pivot (invalidation): 1.3490

Our preference Long positions above 1.3490 with targets at 1.3545 & 1.3585 in extension.

Alternative scenario Below 1.3490 look for further downside with 1.3455 & 1.3430 as targets.

Comment The RSI is bullish and calls for further upside.