USD selloff accelerates, ECB meets

While everyone is speculating on how the ongoing international trade war could worsen if Donald Trump returns to the White House, it was Joe Biden who delivered a blow to the market yesterday as his administration told allies that it’s considering severe restrictions if companies like the Japanese Tokyo Electron and Dutch ASML keep providing China the tools they need to access advanced chip technology. And indeed, despite restrictions, the surging sales to China accounted for almost half of ASML’s revenue in Q2 according to Bloomberg. As such, despite a breathtaking rise in orders from around $3.9bn to $6.1bn that the company announced yesterday, ASML shares tanked nearly 13%, pulling the Stoxx 50 down with it. Tokyo Electron dived 7% on Wednesday and another 9% today. Nvidia fell more than 6.5%, Broadcom dropped almost 8% as AMD crashed more than 10%. Even Tesla fell more than 3% despite Cathie Wood’s prediction that the robotaxi platform that Elon Musk is working on could boost the company’s stock price by 10-fold! Always humble and reasonable, this Cathie Wood. As such, the S&P500 fell from a record as the technology-heavy Nasdaq 100 fell almost 3% - printing its worse day since 2022.

Let’s see if earnings from Netflix and TSM could put a smile back on investors’ face and help TSM – which lost 8% yesterday – recover a part of these losses. But yesterday came as a proof that we don’t necessarily need Donald Trump in the White House to fuel the trade tensions with China and wreak havoc across allies. Biden is good at doing that job, too.

Yesterday’s big tech selloff hit sentiment in small caps too. The Russell 2000 gave back 1% as the US 2-year yield rebounded slightly on cautious comments from the Federal Reserve (Fed) Christopher Waller’s comments that the Fed is getting ‘closer’ to cutting rates but he needs more evidence that inflation is on a solid downside trajectory to back a concrete move.

The selloff in the US dollar index accelerated as the index pulled out a crucial Fibonacci support – the major 38.2% retracement on year-to-date rally. The sharp rise in the Japanese yen amid a suspected FX intervention, and the rally in sterling following a stronger-than-expected British inflation data helped fueling the bearish action in the greenback yesterday. As such, the US dollar index has now stepped into the medium-term bearish consolidation zone with potential for a further weakness. And the fundamentals including a full conviction that the Fed will start cutting the interest rates in September support the negative dollar outlook.

Cable cleared the 1.30 offers after a set of stronger-than-expected CPI figures hammered the expectations that the Bank of England (BoE) would cut rates in August meeting. Yes, the headline CPI is now at 2% in the UK but the services inflation remains sticky near 5.7% and given that services make up to 80% of the British economy, worries regarding the sticky services inflation are funded. What’s encouraging however is that the latest rise in British services inflation was due to a 10% rise in hotel and restaurant prices amid the effects of an almost 10% rise in the minimum wage and Taylor Swift tour. The Euro 2024 – where Brits played the final – will probably have a temporary boosting effect on services and beer inflation as well. But then, if all goes well, we shall start seeing the services inflation figures wane and help the BoE move toward rate cutting near fall. For now, the rapid rise of BoE hawks backs the appreciation of the British pound and could support a further advance in Cable. But given that the Fed rate cut bets went probably a bit far, and that the BoE rate cut bets dropped enough, the upside potential in Cable should be limited. Solid resistance is eyed near 1.3150/1.32 area.

Across the Channel, the EURUSD consolidates gains near 1.0930-1.0940 this morning. The European Central Bank (ECB) will probably announce no change to interest rates at today’s meeting. Any hint that the ECB could cut rates in September should slow down the euro purchases today, but investors are more convinced than not that the ECB will announce a second cut in September. Therefore, if today’s presser doesn’t bring new and unexpected elements on the table, the EURUSD outlook should remain slightly positive faced with the rising Fed cut expectations.

Elsewhere, US crude rallied yesterday on the back of an almost 5-mio-barrel fall in US oil inventories last week. Trump’s ambitions to boost the US oil production could be a turn off for oil bulls. But the Trump trade on oil is not that clear. Yes, Trump wants to pump more, but he also wants to scrap the shift toward alternative energy sources and keep demand for fossil fuel intact. Therefore, a Trump win could be more positive for oil than the contrary. In the short-run, the reflation-positive environment could reasonably keep the price of US crude on a positive track above the $80pb key support level and help the barrel of oil make another attempt on the $85pb level. Appetite above this level will likely remain limited, however, as higher oil prices boost inflation expectations and Fed hawks, and have a natural cooling effect on bullish bets.