Global macro overview for 18/05/2018

Source: Forex Analysis

The dollar remains strong with the support of yields on government bonds and the macroeconomic background continues to support USD. Slight disappointments in the readings of wage and CPI dynamics were quickly forgotten, but the dollar clearly reacted positively to a good report on retail sales. Investors seem to be underweight in USD and even under a weak justification they will seek opportunities to increase their exposure. If anything could disturb this global change to the dollar, it is a clear disappointment in the US data, however, the closest key publications (ISM, NFP) are only in two weeks.

Political factors are also unable to break the US dollar streak, and those that attract attention are not unfriendly to the dollar. The confusion about the preposterous ideas of Italian populists was a black PR for the EUR, although quick official statement protected the EUR/USD against the dominance of the sellers. Disputes in the British government regarding future trade relations with the EU are swinging only with a pound (albeit in both directions). The dollar is more interested in US trade talks with China and Canada and Mexico (NAFTA), but here the overall tone is positive. In this second topic, although a representative of the White House Lighthizer said yesterday that the parties have not come close to the agreement and there are many areas of dispute, the lack of consensus is a headache for Canada and Mexico, not for the US. In turn, relations with China seem to go towards improvement. Media reported by Deputy Prime Minister Chin Liu He at a meeting with US President Donald Trump he offered to reduce the surplus in trade with the US by 200 billion USD by increasing imports of US products and other activities.

In conclusion, the reduction of the US trade deficit with China by 200 billion USD by 2020 is on the Trump administration’s demand list and it can be seen that Trump’s unconventional approach can be effective and harmless to the US. In the result, it will likely make the US dollar to appreciate even more in the short and mid-term, together with another increase in the 10-year US Bond profitability.

Let’s now take a look at the SP500 technical picture at the H4 time frame. The market is still trading below the key short-term technical resistance at the zone of 273.43 – 274.24 in overbought conditions. The technical support at the level of 269.90 had been tested but holds the line as the consolidation zone between the levels of 269.90 – 274.24 is currently the key technical area at this timeframe. If the US-China deal will be successful, then another attempt to move higher will likely to happen and the level of 274.24 will be tested. On the other hand, a failure in reaching the agreement will likely trigger a move to the downside and the support at the level of 269.90 might be under pressure again.

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