Macroeconomic fundamental factors have receded into the background. The focus is on geopolitics. It can be said without exaggeration that the flight of the Speaker of the Lower House of the US Congress towards Taiwan was tracked by millions of people. For example, the flightradar24 service alone gathered a 600,000-strong audience that followed the trajectory of just one aircraft, Nancy Pelosi. Until the last moment, different versions were heard in the media regarding her voyage. Some assured that this was just a political provocation - they say, at the last moment the plane will change course and head, for example, to Japan or the Philippines. Others assumed that the plane would make several circles in the airspace of Taiwan (i.e. China) and leave this area. But the reality turned out to be different. Against all odds, the plane landed in Taipei, the administrative center of the island. This is a significant, and even in a sense, historical event: Pelosi became the highest-ranking American politician to visit the island in the last 25 years.
The possible consequences of this visit have been discussed over the past few months. The visit itself, by the way, was supposed to take place back in April, but then the speaker contracted the coronavirus. Overall, Pelosi's plans to visit the island nation, which China views as its "semi-breakaway" territory, initially drew resentment and threats from Beijing. For example, a Chinese Foreign Ministry spokeswoman said that because of the House Speaker's status as "the No. 3 official in the US government," her visit to Taiwan "would have egregious political repercussions." It should be noted here that Pelosi is indeed the third person in the hierarchy in the system of American power. In the event of the inability of the head of state and vice president to fulfill their duties, the government of the country passes into the hands of the speaker of the lower house of Congress.
During the flight from Kuala Lumpur to Taipei, the situation escalated to the maximum: China pulled troops (ballistic missiles were even noticed in Fujian province), military aircraft of China, Taiwan, and the United States were lifted into the air. Not to mention the "escort" of the board by the US Navy. Panic moods were also whipped up in the information field, up to the possibility of a direct military clash between the US and China. Actually, even ahead of the events, the Chinese Ministry of Defense stated that the Chinese army "will not sit idly by." According to representatives of the Chinese defense ministry, the military will take measures "to curb external interference."
Against this background, headlines with the phrase "Third World War" often began to flash in the press. True, with a question mark at the end of the sentence.
Considering such informational hysteria, the safe dollar was in high demand on Tuesday: paired with the euro, the greenback has more than returned the positions it lost on Monday.
And here it should be noted that despite the fact that the worst and apocalyptic scenarios did not materialize (Pelosi's plane landed safely), it is still too early to talk about any kind of detente. On the contrary, China's reaction should now follow, albeit after the fact.
The Chinese Foreign Ministry first issued a (rather mild, in my opinion) statement in which it noted that the visit of the American delegation "had a significant impact on the political basis of Sino-American relations." More alarming signs followed. In particular, the Chinese Eastern Military Command announced the start of exercises around Taiwan this evening. These exercises will include testing a missile with a non-nuclear warhead. A little later, the intensity intensified: the Chinese ambassador to the United States said that China's response to Pelosi's visit "will be powerful and strong." Various scenarios of Beijing's possible response appeared in the press. If we generalize them, then in general a rather gloomy picture of the immediate prospects emerges. For example, China could break the ceasefire with Taiwan, then strike at its military facilities and send its warplanes and ships to enter the "airspace" and "water areas" of the island.
At the same time, many media outlets note that the events are unfolding ahead of key political "tests" that will take place in the fall in both the United States and China. China will host the 20th Congress of the Communist Party, and the US will host midterm elections to the Congress. The stakes are high - the Democrats may lose their majority in the House of Representatives, and Chinese President Xi Jinping may not become the leader of China for the third time.
Therefore, it can be assumed that the "story of the visit" is not over yet - many observers are confident that China's reaction will be an indicator of how confident it is under the leadership of Xi Jinping. For example, at the time of this writing, it became known that US military installations in the Indo-Pacific region have already been put on high alert. As they say, "the show must go on"...
Given such an unstable and explosive geopolitical situation, it is not advisable to open positions (both for shorts and longs) for the EUR/USD pair now. In the event of a major escalation, the safe greenback will gain momentum again, but if China's reaction is "local" (for example, Chinese troops are limited to exercises near Taiwan), EUR/USD bulls may seize the initiative. All other fundamental factors will not "work" in the near future: the attention of the world will be riveted to the triangle "China – Taiwan – USA".
