Dollar bounces back on trade war jitters

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16 July 2018

thomasdodds

The US Dollar recovered its losses from the previous weeks in a somewhat desultory trading fashion.

T
he move can be explained by Trump’s erratic behavior in his meetings with European leaders, and his constant threats to upend trading relationships in a more or less random manner. However, the greenback managed to rise against every major world currency, save a handful of Latin American ones.

The key event for currency markets this week will be the semi-annual testimony to the US Congress by Federal Reserve Chair, Powell, on Tuesday and Wednesday. We will be listening closely for any sign that the Fed is starting to worry about the potential for a serious trade war between the US and its main trading partners.

Major currencies in detail

GBP

Last week, Sterling trading was surprisingly almost unaffected by the resignation of 2 key members of Prime Minister May’s cabinet. Markets took some comfort that the publication of the Brexit White Paper provides at least a basis for negotiation, and that May appears to be pushing for a softer Brexit than was previously feared.

This week, key macroeconomic news should enable markets to take a break from responding to political headlines. Labour market data (Tuesday) and inflation numbers (Wednesday) should provide clarity about the August rate hike by the Bank of England, which we are expecting, and provide some support for the Pound.

EUR

Trump’s antics provided the main focus for Euro traders last week, given the dearth of economic data released. The common currency largely gave up the previous week’s gains in desultory trading. This week should be equally as quiet, and sparsely staffed trading desks will be looking for the General Affairs council on Friday to seek some clarity on the state of Brexit negotiations from the European Union side.

USD

The most important data release last week was US inflation, which came up almost exactly as expected. This week, in addition to the always unpredictable announcements from the Trump administration regarding trade, markets will be paying close attention to Chair Powell’s testimony in Congress. We look forward to learning more about the Fed’s position on two areas: the potential impact of a trade war on US monetary policy, and the central bank’s take on the lack of significant wage pressures in spite of the low level of unemployment. We think that fresh information in either of these areas could provide for more volatile trading in currencies than most are expecting.