European update – Trade war, Eurozone, Oil, Gold

Trade talk boost fades quickly

US futures are paring gains made on Tuesday on the back of reports that US trade representatives will head to China for talks on Monday.

The news is undoubtedly positive for sentiment in the markets but unfortunately, we’ve got excited about this before which may partly explain why the spike in stocks was so short-lived. Any agreement is still likely to take some time and so investors remain reliant on the Fed to support markets with rate cuts this year.

It’s quite incredible that expectations for a 50 basis point cut at this meeting is still so high, around 20%, given how eager the New York Fed was to clarify John Williams’ comments last week and how Bullard indicated that he supported only cutting by 25. As arguably the most dovish voter, that should have sent a very strong message but as ever, the Fed and the markets don’t appear on the same page.

We’re also into earnings season now so investors are perhaps more focused on second quarter results and companies outlook in this uncertain and gloomy environment. Company results have been quite good so far but the bar was set very low heading into the season so we shouldn’t celebrate too much.

Euro slides on woeful PMI reports

The eurozone manufacturing sector is clearly going through a very challenging period as highlighted by this morning’s PMI data, which showed activity contracting at its fastest rate in more than six years, led by Germany which posted its worst reading since the global financial crisis. Unfortunately, this is no blip, this is a continuation of a very worrying trend that has weighed on the euro and contributed to the view that the ECB needs to reverse course and provide more stimulus.

These are timely releases ahead of tomorrow’s rate decision, although they are unlikely to be bad enough to force through a rate cut just yet. The ECB is expected to reserve that pleasure for September when it will release new economic forecasts, although even that seems a slightly odd decision, coming at Mario Draghi’s final meeting. The euro is under pressure again this morning and is looking to test this year’s lows against the dollar.

GBPUSD Daily Chart

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EIA report eyed after modest response to API drawdown

Oil prices are creeping higher again on Wednesday but given the inventory number we saw on Tuesday from API, it’s perhaps surprising to see that it’s not higher. Should EIA report something similar today then perhaps we may see more of a reaction, especially as expectations for today’s number was initially only a draw of 4.2 million barrels, well short of the 11 million reported by API.

Brent Daily Chart

Gold higher but running out of steam

Gold is trading a little higher today but has been volatile early in the European session. Reports that trade talks will resume initially benefited the dollar on Tuesday, weighing in turn on gold but both have reversed course today in early volatile trade. Gold remains a little off its highs still and may struggle to gather too much upward momentum in the near-term. Of course, longer term, the environment is perfect for gold but it has been on a great run and looks to have run out of steam.

Gold Daily Chart

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Former Craig

Former Craig

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.