USD: Tariff threats unsettled markets - Scotiabank

More tariff threats from President Trump is having a predictable impact on markets. Over the weekend, the president threatened 30% tariffs on the EU and Mexico from August 1. Stocks are weaker and bonds are mixed but Treasurys are underperforming. The US Dollar (USD), after firming modestly in Asian trade, is mixed to softer on the session (both the DXY and BBDXY are weaker). Gold is firmer, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret note.

USD slips alongside stocks and Treasurys

"Relatively muted market movement in response to this sort of trade pressure suggests investors expect a less severe outcome will eventually emerge but time is running short and tariffs will certainly end up quite significantly higher than they were. Slower growth, slower global trade and higher prices may still result. Swaps have pared back a little more of the anticipated Fed easing that had been priced in to the Sep contract, with around 16bps now factored in. Meanwhile, political pressure on Fed Chair Powell is increasing. Friday, the head of Fannie Mae issued a statement saying he was 'encouraged' by reports that Powell is considering resigning."

"There are, in fact, no credible indications that Powell is stepping down or even thinking about it. If the president really wants lower interest rates, this seems to be the wrong way of going about it. The US data calendar picks up materially this week, just not today. CPI (Tuesday), PPI and Retail Sales data are out in the next few days, however, and may reflect the tension between inflation pressures (sticky) and consumer activity (softer) that highlight the challenge for Fed policymakers in the current environment. China releases a raft of data tonight, including GDP, Retail Sales and Industrial Production."

"Data released earlier today reflected stronger than expected gains in China's June exports (+5.8% Y/Y). The DXY retains a firm, short-term undertone but a net loss on the day for the index so far may signal better two-way interest is emerging to challenge the July rebound. Support is 97.60. Resistance is 98.40."