Risk appetite improves on first trade deal, US-Sino talks in focus

Dollar extends gains as trade tensions ease

The US dollar continued to trade higher on Thursday, as following the less-dovish-than-expected Fed decision, market nerves eased further by a bilateral trade accord between the US and the UK.

US President Trump announced yesterday that a “breakthrough” agreement was reached, but with the 10% tariff rate on British imports remaining intact. Britain agreed to lower its tariffs to 1.8% from 5.1% and to provide greater access to US goods.

Investors likely saw the deal as positive as it could serve as a template for other countries that want to find common ground with the US. For example, Trump may be willing to proceed with only the baseline 10% tariff for all the US’s allies and dismiss the reciprocal levies should the talks bear fruit.

What may have offered extra relief to investors were remarks by Trump that he expects substantive negotiations between the US and China and that he wouldn’t be surprised if a deal was reached. The impressive increase in Chinese exports during April, even after Trump’s tariffs on Chinese goods, may have also been supportive.

Wall Street gains, gold pulls back ahead of US-Sino talks

Yesterday’s trade developments allowed Wall Street indices to extend their gains, with the tech-heavy Nasdaq rising 1.07%. Stock futures are also in the green, suggesting a higher open later today. It seems that the market is looking for signs that the trade turmoil will deescalate, which means that the weekend negotiations between the US and China could have a strong impact on how the markets open on Monday.

Along with the other safe havens, gold extended its slide, but today it is rebounding somewhat. The reason may be due to recession fears not fully vanishing but also due to China expanding its gold reserves. According to World Gold Council data, PBoC’s gold reserves rose by around 70,000 troy ounces in April, with the volumes climbing by close to 1mn ounces over the past six months as China is trying to further loosen its dependency on the US dollar.

BoE lowers rates, surprise vote split sends pound higher

Apart from news surrounding the US-UK trade accord, pound traders had to also digest the BoE decision. Policymakers decided to cut interest rates by 25bps, but the decision was far from unanimous. Five members supported the quarter-point cut, while two voted for a bigger 50bps decrease and another two for keeping rates steady.

The BoE said that tariffs could weigh on economic growth, but the outlook was still unclear. “That’s why we need to stick to a gradual and careful approach to further rate cuts,” Governor Andrew Bailey said.

The outcome was less-dovish-than-expected, and that’s why the pound traded higher immediately after the decision. What’s more, investors were quick to scale back their BoE rate cut bets. According to UK Overnight Index Swaps (OIS), they are now expecting another 55bps worth of additional rate cuts instead of 75.

Ahead of the decision, headlines pointing to the US-UK trade deal proved supportive for the British currency, however, after Trump officially announced the accord, the pound surrendered to the dollar’s strength, perhaps in a “sell the fact” market response.