The dollar index soared to its two-year highs yesterday, marking in the area of 98 points. The surge in volatility was primarily due to investors' concerns about China's retaliatory steps in a trade war. However, the dollar did not remain "on horseback" for long. An hour after reaching the peak values, the greenback collapsed throughout the market, especially with respect to defensive assets. Although the US currency is usually in demand during periods of global tensions taking into account possible countermeasures from China, which in this case, investors were afraid to invest in the dollar. Rumors that Beijing could use its advantage in the market of rare metals excited traders, after which the stock market significantly decreased, pulling the greenback and the yield on 10-year Treasuries.
Consequently, the US stock indices slipped yesterday by 1.1-1.6% against the background of investors' concerns about the aggravation of the trade conflict between the United States and China. For example, the Dow Jones industrial index fell by 1.11%, (to 25,490.4) points, the NASDAQ high-tech companies index - by 1.58%, to 7,628.28 points, and the S&P 500 broad market index - by 1.19%, (up to 2822.24 points). The yield on 10-year Treasury securities fell from 2.42% to 2.32%, which was the minimum value since October 2017.
Macroeconomic reports that came out in the red zone yesterday also put pressure on the dollar. According to data published yesterday, sales of new buildings in the United States decreased by 6.9% to 673 thousand compared to the revised March figure. This is the weakest result since December of the year before.
According to preliminary estimates with the updated multi-year lows and a composite US PMI, it collapsed to 50.9 points in May with a forecast of growth to 53.6 points in April. An increase to 53 points was recorded. The indicator came close to the key mark of "50", which is the boundary between the improvement and the deterioration of the situation in the business sphere. According to one of the experts, the rate of created business projects showed the lowest result since the 2008 crisis.
Although the macroeconomic data published yesterday are of a secondary nature, they added to the alarming fundamental picture. According to most analysts, the further conflict between the US and China will lead to the fact that economic growth in America will slow down. According to investors, Chinese countermeasures may cause more significant damage to the US economy than previously thought.
Yttrium, scandium, erbium, lanthanum, lanthanoids - all these little-known names of representatives of rare-earth metals suddenly appeared to be heard by traders. After all, experts believe that it is in this area that Beijing can strike back with an economic blow to the States. The fact is that China annually produces more than 100 thousand tons of rare-earth metals, which in turn amounts to more than 80% of the total world production. Such a monopoly position in the RMZ market allows Beijing to "show its teeth" in a trade war. An embargo or restriction of the export of rare-earth metals from the PRC will deal a severe blow to the American technological sector. These metals are actively used in radio electronics, instrument making, nuclear engineering, mechanical engineering, chemical industry, and metallurgy. RMZ is used almost everywhere, even in the production of mobile phones.
In other words, China has a powerful Trump card in the trade conflict and is fully capable of using it - at least the unexpected visit of the PRC leader to one of the enterprises for processing RMZ eloquently testifies to this. At the same time, Beijing proposed to resume negotiations through its diplomats but on condition of "equality of the parties". What exactly is behind this general demand can only be guessed, but at the same time it is obvious that Beijing will demand additional concessions from the Americans. So far, the White House is not ready to take such steps and at the same time, the recent actions of Washington suggest the opposite. In particular, it became known that the States, following Huawei, can also blacklist the Chinese corporation Hikvision yesterday. This company is one of the world's largest manufacturers of video surveillance equipment.
It is worth noting that immediately after the introduction of sanctions against Huawei, Washington took a step back, issuing the appropriate 90-day license to the Chinese. However, these are not signs of a "thaw" in relations between the PRC and the United States since the trade war is in full swing. Apparently, it has moved to a "technological level". Such metamorphoses were not to the liking of dollar bulls, which are forced to follow the stock market and the yield of 10-year-old treasuries.
All of these allow buyers of EUR/USD pair to divert the price from the base of the 11th figure, protecting themselves from stalling in the 10th figure and below. The single currency is still helpless, thus the corrective growth of the pair is due only to the weakness of the dollar. Currently, traders are testing a resistance level of 1.1190 (the middle line of the Bollinger Bands indicator, which coincides with the Tenkan-sen and Kijun-sen lines). If the EUR/USD bulls overcome this target, they can count on the assault on the upper line of the Bollinger Bands, which corresponds to the price of 1.1235. When consolidating above, the pair will finally return to its "April range" of 1.1240-1.1310.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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