China-US Tariffs: Impact on Forex

Hello, I am professional trader Andrea Russo and today I want to talk to you about a hot topic that is shaking up global markets: the introduction of new tariffs by China towards the United States and the impact that this news is having on the Forex market.

A New Chapter in the US-China Trade War
For weeks, the investment world has been monitoring the evolution of tensions between two of the world's largest economies: the United States and China. After months of negotiations, China has decided to implement new tariffs on US products, intensifying the trade war that began a few years ago. The news had an immediate effect on global markets and, as always, Forex is one of the markets most sensitive to these geopolitical developments.

Direct Impact on USD Currency Pairs
The US dollar (USD) suffered a strong backlash after the announcement. In fact, the tariffs can reduce US exports to China, negatively affecting the US trade balance and fueling uncertainty among investors. The immediate result? A weakening of the dollar against several currencies.

The most affected currency pairs were:

EUR/USD: The euro gained ground, rising to levels not seen in weeks. Economic uncertainty resulting from tariffs has prompted investors to flee to currencies deemed safer, such as the euro.

GBP/USD: The British pound followed a similar trajectory, gaining against the dollar. Although Brexit remains a hot topic, the weakness of the dollar has given the British currency some respite.

USD/JPY: The Japanese yen, traditionally considered a safe haven, benefited from the uncertainty, appreciating against the dollar. A flow of capital into Japan was a direct result of the change in risk perception.

Effects on the Chinese RMB
The Chinese currency, the renminbi (RMB), has also fluctuated significantly. While China is trying to limit the effect of tariffs on its domestic market, the market response has been cautious. In particular, investors are preparing for a possible controlled devaluation of the renminbi, with the intention of maintaining the competitiveness of Chinese exports, which could suffer from higher tariffs.

The Role of Central Banks
Another factor that cannot be ignored in this context is the approach of central banks. The US Federal Reserve (Fed) could decide to review its monetary policies to counter the negative effects of tariffs on the dollar. We could see an easing of monetary policy or even a reduction in interest rates, unless the Fed wants to contain the rising inflation caused by tariffs.

On the other hand, the People’s Bank of China (PBoC) could be forced to take measures to support the Chinese economy. The possibility of a currency intervention could have significant effects not only on Forex, but also on other asset classes such as commodities and stock markets.

How to Capitalize on the Situation in Forex Trading
The developments surrounding the US-China trade war are a boon for Forex traders, provided they are able to carefully monitor the news and react quickly. Here are some strategies to consider:

Breakout Trades: The news of the tariffs has triggered significant movements, and experienced traders can look to enter breakout trades on the most volatile currency pairs. This involves looking to enter long or short positions when a currency pair breaks out of certain support or resistance levels.

Risk-Based Strategies: The uncertainties surrounding the trade war can force traders to be more selective in their trades. Careful risk management strategies, such as risk-reward ratios and stop-loss orders, are essential to navigate the turbulent waters.

Monitoring Central Bank Statements: Any signals from the Fed or the PBoC are crucial. Traders should be prepared to react quickly to any changes in monetary policies, as they can immediately impact the value of the currencies involved.

Final Thoughts
China’s decision to impose new tariffs on the United States marks a new phase in the trade war between the two economic powers. In an already volatile Forex market, this move adds further uncertainty, with the USD likely to face a period of weakness while other emerging currencies, such as the renminbi, could suffer mixed effects.

Happy trading to all.
Andrea Russo