The trade war is on the verge, and European political turmoil continues! Where is the foreign exchange market going this week?

FX168 Financial News (Hong Kong) News Monday (March 5) Kathy Lien, managing director of foreign exchange strategy of BK Asset Management, wrote a heavy analysis and forecast of the exchange rate of the US dollar and major currencies.

Kathy Lien's views are as follows:

Last Friday (March 2), the US dollar continued to fall. US President Trump said that it would increase tariffs on steel and aluminum. Canada, the EU and China have all accused the United States. Canada said that the United States is unacceptable for increasing tariffs on steel and aluminum. The EU and China said that if the United States increases tax cuts, it will take protective measures.

The EU has decided to hold a meeting this week to discuss countermeasures. The EU's first step is to file a lawsuit against the WTO. Historically, similar incidents occurred in the US President George W. Bush era, when it took a year and a half to remove the tariff. The WTO announced that Bush violated US tariff commitments and said that the sanctions would be fined $2 billion, but Bush ignored the threat and insisted on raising tariffs until the EU raised tariffs on oranges and cars, eventually ending with Bush’s demise. The leaders of overseas countries are not expected to be so patient and may take radical and rapid responses to Trump. From any of the results, the global trade tension bureau fabric will intensify, and the USD/JPY may fall further.

Whether the impact of the trade war will exceed US economic data, including the US non-farm payrolls report, whether the US non-farm payrolls data is strong or weak, the new chairman of the Federal Reserve (FED) will raise interest rates this month. The Federal Reserve Board of Directors Dudley said that the rate hike will be "gradual" and the dot matrix chart is expected to be revised.

In terms of economic data, the USD/JPY is expected to rise after the release of the US non-farm payrolls report this week, but the economic data is weaker than the impact of political events. If China speaks on tariffs and expresses its willingness to buy government bonds, the USD/JPY may quickly fall below the 105 mark. In addition to US non-agricultural data, this week the US will also announce non-manufacturing ISM, trade accounts and Beige Book.

The euro focused on the Italian elections on Sunday (March 4) and the results of the German Social Democratic Party vote. All votes of the Social Democratic Party will be announced this Friday (March 9) and the final results of the election will be announced shortly. There are two outcomes - members of the Social Democratic Party voted in favor, and Merkel formed a coalition government. And if the Social Democrats voted to veto, they would either bring in new elections or Merkel would try to form a minority government. The former is good for the euro, while the latter is bad for the euro.

In Italy, the results of the poll on Sunday (March 4) showed that the “Five Star Movement” party is in a leading position, and this “anti-Euro” victory will be dangerous for the euro. If the coalition government does not have a single party to win a majority, the negative impact on the euro/dollar will be smaller, and the only clear positive result will be the victory of the current government.

In addition to the above political risks, the European Central Bank (ECB) will hold a monetary policy meeting in March, and investors will be eager to see if they will change their forward-looking guidance. Despite the current hawkish remarks, there are reports that the ECB will wait until the summer to change its forward-looking guidance, given the tight trade situation, stock market turmoil and general economic slowdown.

The Reserve Bank of Australia (RBA) and the Bank of Canada (BOC) are expected to be cautious this week. The Australian dollar did not close at the low level last week, as risk aversion heats up and Australian economic data weakens.

Unlike the recent Eurozone economic data that has fallen from several months or years of highs, the Australian economy has not experienced any significant growth in the past few months. Since the last monetary policy meeting, retail sales in Australia have declined, consumer confidence has fallen, employment growth has slowed, consumer inflation expectations have eased, housing activity has slowed, and the trade deficit has doubled. The only good news is that the weaker dollar is driving higher commodity prices, and Australia's current service and construction activities remain healthy, keeping business confidence stable.

The Reserve Bank of Australia has little reason to change its neutral policy bias, so the Australian dollar's response is expected to be limited. Conversely, recent economic reports, such as service PMI, retail sales, fourth-quarter GDP, and China trade accounts, may have a greater impact on the Australian dollar exchange rate. But we finally believe that the Australian dollar and New Zealand dollar trading will be guided by the market demand for the US dollar.

In addition, in terms of commodity currencies, the USD/CAD has risen for five consecutive trading days in the past week, and the most recent volatility has caused the exchange rate to fluctuate within five points of a seven-month high. Weak economic data, the uncertainty of the North American Free Trade Agreement (NAFTA), the rise in risk aversion and the fall in oil prices have combined to make the Canadian dollar the worst performing currency last week.

As the largest supplier of steel and aluminum in the United States. Canada is a huge victim of tariffs, all of which may be a step in the US exit from the North American Free Trade Agreement. Canada faces the possibility of greater trade “trouble” and is expected to push the USD/CAD to break the 1.30 mark.

Last but not least, it is not surprising that British Prime Minister Teresa May’s Brexit speech failed to bring confidence to the pound trader and British investors. The progress of the Brexit negotiations in the UK has not been smooth, as the EU has proposed clauses that the Prime Minister considers unacceptable. She insists that Britain will withdraw from the customs union, but seems willing to consider establishing a “customs partnership”, the UK will provide the EU with the same import requirements as the EU, and a “highly simplified customs agreement” to promote border activities. On the border issue of Northern Ireland, Teresa May's speech did not provide any meaningful solutions. Instead, she reiterated that she did not want a tough border and threw the "ball" back to the European Court of Justice, saying that they could not find a solution themselves. "This is the result of the joint efforts of all of us."

All in all, after the developments last week, the UK is far from the Brexit agreement. In terms of economic data, the UK will mainly publish comprehensive PMI and trade account data in the following week, but in the face of major central bank interest rate resolutions and major political risk events in the US and Europe, the impact of these data needs to be relegated.

Proofreading: Baifeite