Buoyed by a strong domestic economy and a stock market inflated by repatriated corporate profits, the White House continues to look for concessions from major trading partners. We see no let-up in this protectionism ahead of November US mid-term elections, spelling trouble for pro-cyclical currencies
The US economy continues to grow near 4%, US equities continue to perform well, and the Federal Reserve looks on course to hike in both September and December. Expect President Trump to continue to use this window of US out-performance to pressure China into trade concessions. Expect the $/EM complex as a whole to stay bid into November.
This environment should see EUR/USD remain under pressure – especially until the Italian 2019 budget is submitted in late September. Perhaps the biggest hope for a EUR/USD recovery now comes from President Trump trying to talk the dollar lower – potentially again via soft criticism of Fed tightening.
Within Europe uncertainty reigns. The market is increasingly wary of a ‘no-deal’ Brexit, but we think this is unlikely and that GBP could again enjoy a short squeeze into year-end. CEE does not look quite as compelling as it did earlier this year, although we continue to
see good stories in the likes of the PLN and the CZK.
And of course, investors will be monitoring developments in Turkey, Argentina and Brazil at a time when the external environment looks particularly challenging.