So, after the battle with China, Trump is now focusing on the EU, threatening to hike tariffs to 50% in a week.
The stock markets tumbled, but so did the USD Index, an in response, the precious metals sector moved higher. Before drawing conclusions from this observation, please note that we’ve already seen it about two months ago.
Remember the “Liberation Day”? This is all Liberation Day all over again.
The above chart is where the really big change happened.
Stocks finally invalidated the breakout above their late-March high, which suggests that the tide has turned. I wrote about that many times recently, so you likely know about the significant of this move.
This opens the door to another slide – similar to the one that we saw in April or a bigger one, as the markets may now be disillusioned about the tariffs being just a temporary phenomenon. They are here to stay – what we heard as delay of their implementation was just that – not their cancellation.
The entire rally that we saw recently seems to have been based on the premise that the tariffs were just a trick to get some sort of political benefit and that they wouldn’t be implemented or raised. Even the recent truce (it’s not a “deal” yet) with China resulted in U.S. tariffs at higher level than they were before April. The same is likely for the EU. Perhaps the 50% will not last, but it looks like significant tariffs are here to stay, and it is this lasting impact that the markets are likely to digest now.
Anyway, just as the impact wasn’t immediate in April, we’re likely to see a delayed – but significant one in the near future.
The USD Index declined as well, but the 61.8% Fibonacci retracement level and the 2023 low once again triggered a reversal. No technical damage was done. The bottom still appears to be in.
Now, will the USD Index decline in a few days? Not necessarily. This time, the long-term technical picture for it is very different. The very long-term and very strong support levels were reached, and while they might be re-tested, it doesn’t have to be the case.
The reason is that this time the tariffs are mostly about the EU, and the EUR/USD is the primary component of the USD Index.
Tariffs for products coming from the EU (priced in EUR) are (likely) going to be increased. This means that the prices for them for the US consumers will increase and thus the demand for them will decrease. This means that also the demand for the euro from the U.S. buyers will decline. This means lower values of euro relative to the U.S. dollar, and a decline in the EUR/USD pair. This should result in higher USD Index values.
If there are retaliatory tariffs of equal importance, then stock markets of both countries should take hits, but the currency pair might not react. Or the USD might actually strengthen given its safe-haven appeal (which recently lost some of its gleam, but the U.S. still remains world’s most powerful economy with the world’s most powerful army and the USD is still world’s reserve currency).
What does it mean? Lower stock prices, lower commodity prices and quite likely higher (or relatively unchanged) USD Index values, if not immediately, then it’s all likely to happen soon.
Most importantly, remember – the initial reaction in early April was opposite of what really happened in the following days. The situation is repeating here, so the markets are quite likely to react in a similar way.
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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief