US dollar trades higher as US/UK traders come back

Summary:

• US dollar leads the gains in the morning after subdued trading on Monday
• European Commission considers an excessive debt procedure against Italy
• European Union ready to reject any US proposals regarding curbing imports of EU cars as well as auto parts

King dollar, Italy under pressure

After a holiday on Monday US and UK markets are coming back and the new day in the FX market has begun with the stronger US dollar amid thin liquidity. The Bloomberg dollar index is going up 0.2% at the time of writing and the largest gain is made against the shared currency which has something to do with reports we were offered yesterday from the European Commission. Namely, the European institution informed on Monday that it was considering proposing a disciplinary procedure against Italy as soon as next week. The reason behind such a decision is a failure in reining in debt which, in relation to GDP, has already more than doubled the limit set by the European Commission. A possible penalty would be placing by Italy a non-interest bearing deposit of up to 0.2% of GDP, which is around 3.5 billion EUR. The decision could be made already on June 5, however, before punishing Italy all EU finance ministers would have to agree to do so. It is worth adding that in its history the EU has never used a so-called excessive debt procedure. In this regard one needs to also consider the European elections’ outcome there - the Eurosceptic Lega triumphed. It would mean that the Lega’s leader Matteo Salvini could feel more empowered to oppose the EU. On Monday he said “I think Italians gave me and the government a mandate to completely, calmly and constructively re-discuss the parameters that led to unprecedented job instability, unemployment and anxiety.” Salvini also added that taxes would not be raised, a VAT increase would not happen. In response to these reports Italian bonds slumped with the yield on 10Y bond climbing 12 basis points at the end of Monday’s trading. In turn, the FTSE MIB erased its all previous gains and closed slightly below the flat line.

The US dollar index is climbing this morning. The price bounced off its short-term support line at around 97.40 and it could be poised to try to head toward the upper end of the triangle pattern. Source: xStation5

EU says no to US proposal

On May 17, US President Donald Trump decided to hold off a decision regarding auto tariffs on European cars and parts. In the meantime the US proposed to curb imports of EU cars and parts, the idea was rejected by the EU yesterday. It needs to be said that imposing duties on European cars and parts would be particularly painful for Europe’s carmakers as the value of EU automotive being exported to the US is roughly ten times greater that the block’s steel and aluminium exports there. If that happened, it would mark a substantial escalation of transatlantic trade tensions resulting in further disruptions in global trade. The EU has already suggested that it is ready to impose tariffs on 20 billion EUR goods being imported from the US if the latter decides to go to war.

In the other news:

• Japanese PPI for services rose 0.9% YoY in April, below the estimate of 1.1% YoY

• Australian weekly consumer confidence indicator ticked up to 118.6 from 117.2 last week

• Chinese Shanghai Composite is gaining almost 1% at the time of writing, while SP500 futures point to a positive start to Tuesday’s trading