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US-China trade war is the dominant theme in the markets today. Initial reactions were muted to US announcement of the product list in Section 301 tariffs on China. However, global stock markets were rocked by China's immediate response of its own retaliation measures against the US. The speed of response showed that China is not backing down. The more optimistic read of today's development is that there is no implementation date for the tariffs of both side yet. And China already expressed the willingness to go back to negotiation table. But at the same time, the "intensity" of China's response surprised most of the analysts. And the tensions could escalate easily if the US respond by counter-retaliation measure. Then, the cycle will be never-ending.

Nonetheless, for now, there should be much time for markets to digest the news. US public and companies will have until May 22 to comment and object to the Section 301 tariff product list. And, China will certainly not initiate any further action before the US tariffs are finalized and implemented.

Global stocks hit by trade war news, Dollar mildly higher after ADP

The global stock markets are hit hard today. Hong Kong, as the center of the storm, has its HSI index dropped -2.19%. It's sort of an escape for Chinese stock traders as the Ministry of Finance's announcement was made after market close. And there will be two days of holidays in China ahead. In Europe, DAX is being the worst victim as it's losing -1.2% at the time of writing. DAX is down -0.87%. FTSE is down just -0.36%, partly thanks to Sterling's weakness. US futures point to sharply lower open that could completely reverse yesterday's rebound.

In the currency markets, Dollar is lifted mildly higher into US session. Much better than expected ADP employment data, (241k vs expectation of 205k) is giving the greenback a lift. But for the day New Zealand Dollar and Yen are the strongest ones. Canadian Dollar is, on the other hand, the weakest one followed by Sterling.

China announced 25% retaliation tariffs to USD 50b of US imports, including soybeans, aircrafts

In response to the Section 301 tariffs of the US, China announced retaliation tariffs on 106 US products. Total product values add up to USD 50b, matching the size of the US action. Products include soybeans, autos, aircrafts etc, targeted at Trump's and Republicans' supporter base. Tariff rate is 25%. There is no implementation date yet. Vice Finance Minister Zhu Guangyao said there is room for negotiation and hoped there will be a resolution via WTO. There is no arrangement for public comments, no hearing whatsoever regarding the retaliation tariffs. And actually, no one expects such kind of democratic arrangements in China. That's being said, China is ready to fire any time.

Trump: We're not in trade war with China... but we cannot let this continue

US President delivered his morning tweets as usual. Regarding China, he said "We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!"

He also mentioned Mexico and Canada and said "Our Border Laws are very weak while those of Mexico & Canada are very strong. Congress must change these Obama era, and other, laws NOW! The Democrats stand in our way - they want people to pour into our country unchecked....CRIME! We will be taking strong action today." It usual if there is anything to do with this tweet and the rumored rushed preparation of NAFTA draft.

US announced tariffs on 1300 products, targeting "Made in China 2025" plan

Earlier today, the US Office of the United States Trade Representative released the list of products regarding the Section 301 tariffs against China. The action will impose 25% tariffs on approximately USD 50b of Chinese imports to the US "in response to China's policies that coerce American companies into transferring their technology and intellectual property to domestic Chinese enterprises." And the Trade Res presentative claimed in the statement that these policies "bolster China's stated intention of seizing economic leadership in advanced technology" in its "Made in China 2025" plan.

The proposed list of products covers around 1300 tariff lines, focusing on technological and industrial products, like televisions, medical devices, batteries, aircraft parts etc. The list will be finalized after public comment, including a hearing on May 15 in Washington. And companies will have until May 22 to file final objections. There is no implementation date yet.

Eurozone unemployment dropped to decade low, CPI accelerated

From Europe, Eurozone CPI accelerated to 1.4% yoy in March, up from 1.1%, and met expectation. Core CPI, however, was unchanged at 1.1% yoy, missing expectation of 1.1% yoy. Unemployment rate dropped to 8.5% in February, met expectation, and hit the lowest level since 2008.

UK PMI construction, however, dropped to 47 in March, down from 51.4, much worse than expectation of 51.0. Markit noted construction activity fell amid unusually bad weather in March. UK BRC shop price dropped -1.0% yoy in March.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.4023; (P) 1.4056; (R1) 1.4091; More....

Much volatility is seen in GBP/USD today but it's, after all, bounded in tight range above 1.4008 temporary low. Intraday bias stays neutral first. On the downside, firm break of 1.3982 support will indicate completion of the rise from 1.3711. In that case, intraday bias will be turned back to the downside for retesting 1.3711. Nonetheless, strong rebound from 1.3982, followed by break of 1.4095 minor resistance will turn bias to the upside for 1.4243. Break will resume the rally from 1.3711 for 1.4345 high first.

In the bigger picture, as long as 1.3038 support holds, medium term outlook in GBP/USD will remains bullish. Rise from 1.1946 is at least correcting the long term down from 2007 high at 2.1161. Further rally would be seen back to 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466. However, GBP/USD fails to sustain above 55 month EMA (now at 1.4259) so far. Break of 1.3038 support, will suggest that rise from 1.1946 has completed and will turn outlook bearish for retesting this low.

Economic Indicators Update

USDCAD has been consolidating since September 2017 and has been stuck in a channel titled slightly to the upside. The neutral to bullish picture in the short term looks to last for a while longer after prices failed to break above the upper channel in mid-March for a more clear tendency.

Resistance was met at around 1.2940 region, which holds near the 50.0% Fibonacci retracement level of the downleg from 1.3800 to 1.2060, forcing the pair to reverse lower. The negative bias in the near term is supported by the MACD oscillator. The index is falling below its trigger line and is approaching the negative zone. However, the RSI indicator stands below the 50 level but is sloping slightly to the upside.

If prices continue to head lower, below the 1.2800 handle, support could come from the 38.2% Fibonacci mark of 1.2720. A drop below this region would reinforce the short-term bearish correction and open the way towards the 23.6% Fibonacci near 1.2460.

However, should an upside reversal take form, immediate resistance will likely come from the 20-day SMA around 1.2940 and the 50.0% Fibonacci. A successful penetration of the latter level could shift the bias back to a bullish one, with the next resistance coming from 1.3130 level.

The Canadian dollar has edged lower in the Wednesday session, after recording strong gains on Tuesday. Currently, USD/CAD is trading at 1.2837, up 0.24% on the day. There are no Canadian indicators on the schedule. In the US, ADP Nonfarm Payrolls climbed to 241 thousand, crushing the estimate of 208 thousand. Later in the day, we’ll also get a look at ISM Non-Manufacturing PMI, which is forecast to drop to 59.0 points. On Thursday, the US releases unemployment claims and Canada will publish Trade Balance.

The tariff spat between China and the US continues, and the growing possibility of a global trade war could be devastating for the Canadian economy, which is heavily reliant on exports. The Chinese government has fired the latest salvo, announcing 25% tariffs on 106 American products, including soy beans, wheat and some motor vehicles. The value of these US exports amounts to some $50 billion – the same value as Chinese exports which have been slapped with tariffs by President Trump. This represents a significant raising of the stakes, and has the markets worried. China’s deputy finance minister has said that a trade war between the two sides would be a ‘lose-lose’, and few investors would disagree with his diagnosis. However, neither Trump nor Chinese President Xi Jinping has blinked so far, and the crisis shows no signs of being resolved anytime soon. As one US analyst wrote this week, “trade wars are easy to start but hard to stop.”

After months of arduous negotiations, is a NAFTA agreement within reach? US President Trump has been pushing hard for a renegotiated NAFTA, and had threatened to walk away from the talks if his demands were not met. There are some outstanding issues still on the table, such as the US demand that all NAFTA-produced cars contain at least 50% US content and Trump’s demand that Mexico pay for a wall on its border with the US. Still, negotiators have sounded cautiously optimistic, and a report earlier this week said that the US was pressing for an announcement of agreement-in-principle at next week’s Summit of the Americas in Peru. The Canadian dollar has been under pressure over lingering uncertainty with regard to NAFTA, and a new deal could boost the Canadian currency.

USD is lifted by better than expected job data in early US session. ADP report showed 241k growth in private sector jobs in March, well above expectation of 205k. Prior month's figure was also revised up from 235k to 246k.

Meanwhile, GBP is suffering some steeping selling after today's much weaker than expected construction PMI, which dived into contractionary region at 47 in March. While EUR was supported by CPI and employment data, it only performs better than GBP in the current 4-hour bar.

For the day, with US-China trade war as the main theme, NZD and JPY are trading as the strongest one. GBP is the weakest one, followed by CAD.

The euro has moved back towards the pivotal 1.2300 level against the greenback, after better than EU Unemployment data and marginal intraday weakness in the U.S dollar. The EURUSD pair currently trades around the 1.2290 level, after falling to sustained price-action above the 1.2300 level. Traders now look to updates on further possible Chinese trade tariffs, and the release of monthly jobs data from the United States economy.

The EURUSD pair retains a bearish bias whilst trading below the 1.2300 level, key intraday technical support is currently found at the 1.2275 and 1.2252 levels.

If EURUSD price-action can hold above the 1.2300 level, buyers may push towards the 1.2334 and 1.2382 resistance levels.

The British pound continues to move higher against the U.S dollar, with price-action reaching a new weekly trading-high of 1.4097, as general demand for sterling continues. Yesterday the GBPUSD pair was met with strong dip-buying demand from the level 1.4019 level, with the British pound also reverting away from its traditional correlation with the euro. Traders now look towards the release of the U.S ADP jobs report, which measures monthly Private sector employment in the United States economy.

The GBPUSD pair is weekly bullish whilst trading above the 1.4087 level, further upside towards 1.4146 and 1.4200 now seems possible.

Should price-action on the GBPUSD pair fail to gain traction above the 1.4087 level, sellers may move the pair back towards the 1.4046 and 1.4008 support levels.

EUR/USD remained stranded between the 55– and 100-hour SMAs and the senior channel on Tuesday morning.

The pair failed to gather the necessary upside momentum to push through these lines and the monthly PP circa 1.2320, thus allowing bears to breach the six-month senior channel. The 40-pip fall which occurred mid-session was stopped near the weekly S1 at 1.2250.

The pair has since recovered and is approaching the combined resistance of the aforementioned SMAs and the senior channel line near the 1.23 territory. This level is unlikely to be surpassed in case US fundamentals released mid-session do not provide strong bullish momentum. Gains, however, should not exceed 1.2320.

Meanwhile, it is more likely that the Euro is pressured lower down to 38.20% Fibo at 1.2236.

Despite showing high volatility, GBP/USD remained located above the 55-hour SMA on Tuesday and has therefore maintained its movement in a narrow ascending channel.

As a result, the Pound was located between the 55-, 100– and 200-hour moving averages and the weekly PP this morning. The 55– and 100-period SMAs on the 4H time-frame are likewise bounding the rate.

This session includes three sets of noteworthy fundamental releases that are likely to introduce volatility in the market. It is expected that a breakout from any of the two barriers would direct the rate's further direction today.

In case the 200-hour SMA at 1.4105 is surpassed, the Sterling should target the breached channel line circa 1.4150. On the other hand, a move below its nearest support at 1.4020 is likely to push the Pound down to 1.40.

The US Dollar was guided by strong upside momentum on Tuesday. This movement began shortly after the pair hit the 200-hour SMA early in the session and was followed by a breakout of four resistance levels. By Wednesday morning, the Greenback was fluctuating near a down-trend.

It is apparent that the pair is moving steadily towards the medium-term channel and the 23.60% Fibo located at 106.80. Both lines have previously succeeded at reversing the rate near 107.00. This means that the current upward movement might still continue until this psychological level is reached.

In terms of support, the Greenback is unlikely to move below 55– and 100-hour SMAs at 106.35. Today's fundamentals, however, could introduce some changes to this assumption.

Following a sharp up-move on Tuesday which was caused primarily by weaker US Dollar, the yellow metal surrendered some of its positions during the previous session.

As a result, the pair was pushed down to the monthly PP at 1,330.00. Its subsequent movement was guided entirely by the 55-hour SMA which had pushed the rate to the combined resistance of the 200-hour SMA and the 23.60% Fibo near 1,335.60 by Wednesday morning.

Technical indicators remain bullish for this session, thus suggesting a move towards the senior channel and the monthly R1 at 1,355.00—the pair's highest level in March. This scenario should still be confirmed by a breakout of the long-term moving average.

Meanwhile, Gold's direction during the following week is expected to be south in line with the senior channel.