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27.05.2020 09:57 AM
EUR/USD: The global economy is at risk of shrinking. Donald Trump's plans in response to Hong Kong's autonomy bill.

Risky assets are currently in demand, but the situation may reverse if relations between the US and China deteriorate. The latest issue between the two countries is the intervention of the White House in China and Hong Kong's dispute regarding autonomy. US President Donald Trump made a number of statements yesterday on this subject, promising tough measures that the US will take against China if it does not leave Hong Kong alone.

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Trump did not confirm the implementation of sanctions, but said that the actions of the White House will be "something powerful".

According to media reports, the White House will resort to a number of sanctions, but not a trading plan, and impose it against high-ranking Chinese officials, as well as companies and financial institutions. It may be freezing of assets in the US, or a ban on entry. Final decisions have not been made, but everything may change rather quickly, depending on Beijing's reaction to these statements.

This weekend, US Presidential Advisor Robert O'Brien said that the US may impose sanctions on China with regards to its national security bill, through which Beijing plans to "acquire" Hong Kong. The threat to Hong Kong's autonomy, which started in 1984, reached a new level after the Friday session of the National People's Congress, to which NPC representatives claimed that such acquisition will not affect the rights and freedoms of the people residing in Hong Kong. The US did not agree to the claims, and Secretary of State Mike Pompeo said that any decision by the PRC that affects Hong Kong's autonomy and freedoms will lead Washington to revise relations with China.

Meanwhile, anti-government protests and demonstrations have been held in Hong Kong, which were dispersed by police, and detained more than 180 people. The main protest was in accordance to the issue on national security, which is currently being discussed by the Chinese parliament.

Any tough decision by Trump in this direction will undermine the already thin line of relations between the US and China, which have been established at the end of last year. In addition, the pressure from the US administration against Beijing regarding the approval of independent experts to investigate the causes of the COVID-19 outbreak in Wuhan, is still very much present. In this regard, although the situation worldwide is gradually improving, and the economies are returning to its former states after the removal of quarantine restrictions, the negative development of the relationship between the two countries can very much affect the dynamics of the risky assets, strengthening the demand for safe haven assets.

Meanwhile, the data published yesterday on the US economy partially returned the demand for the US dollar. According to a report, sales of new homes in the US in April this year, indicating a bright recovery of the market after the pandemic.

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The data revealed that sales in the primary housing market increased by 0.6% in April, amounting to about 623,000 houses a year. The figure was much higher than economists forecast of about 490,000 new home sales in April. On average, the price of a house in April was $ 309,900, compared to $ 339,000 in April 2019.

The increasing consumer confidence in the US also indicates the bright recovery of the economy. According to the report of the Conference Board, consumer confidence in the US rose to 86.6 points in May, up from economists forecast of 82.3 points. The increase was due to the removal of quarantine restrictions in the country, but many consumers are still worried about the future, especially since the prospects of economic recovery are unstable, and the probability of a second wave of coronavirus outbreak is high.

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The possibility of a second wave is also mentioned by the PAHO head Carissa Etienne, who, in her interview, said that some US states, which have a very serious situation on the pandemic, should not lift the quarantine restrictions to avoid much more serious problems . According to Etienne, maintaining the fairly aggressive quarantine measures is necessary, since over the past days, the number of infections in the US increased by 57,171, which is 57% of the global number.

With regards to economic activity, the Chicago Fed reported a record decline in the index in April this year, from which according to the data published, economic activity in April 2020 completed to -16.74 points, much lower than the previous value of -4.97 points . The huge drop was due to the quarantine restrictions imposed to combat the spread of the coronavirus. All four categories of the indicator decreased and made a negative contribution to the overall index.

Meanwhile, manufacturing activity grew, which signals a good recovery in the market. According to the report published by the Dallas Fed, the manufacturing index recovered to -28.3 points in May this year, while the general index of business activity rose to -49.2 points.

The increase was due to the improving business conditions, as well as on the removal of strict isolation measures

As for the current technical picture of EUR / USD, a breakout from the level 1.0950, to which traders are currently focusing, will lead to large sell-offs of risky assets, which will completely cancel the increase that was observed yesterday. The closest support levels in this case will be the lows 1.0870 and 1.0800. Meanwhile, a breakout from the resistance level 1.0995 will most likely lead to the growth of the trading instrument above the 10th figure and the renewal of highs around 1.1090 and 1.1140.

Jakub Novak,
Analytical expert of InstaForex
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