EUR/USD. Trump does not need a strong dollar
US President Donald Trump became the main newsmaker of the foreign exchange market. His statements, intentions and threats affect the mood of traders and determine the dynamics of many currency pairs.
And now the US currency is under pressure of its criticism concerning the Fed’s actions. Although Trump is quite consistently defending the position of the “cheap dollar”, if we recall his statements in the election period. Simply now, his criticism sounded at the most inappropriate moment for the dollar bulls – when the market finally came to some confidence in a four-fold increase in the interest rate this year. The dollar began a full-scale offensive to the basket of major currencies, but was “shot down on the rise” by an unexpected attack of the US President.
In general, against the background of the “diplomatic” Democrat Barack Obama, the Republican Donald Trump still shocks the markets with his directness and protectionism. Here it is worth recalling the case when in the summer of 2015 the AFP news Agency reported that Obama during the closed (!) talks with the leaders of The G-7 expressed concern over the high dollar. In this case, the agency referred to an anonymous source in the diplomatic circles of France. Despite the questionable reliability of this information and the non-publicity of the phrase itself (if it was even uttered), the White house then reacted instantly. The official website of the US President published a release, in which it was repeatedly stated that the head of state does not interfere in the issues of the foreign exchange market.
In this context, Trump looks like a real antipode of Obama. “It is necessary to weaken the dollar” – this is the loudest statement (on the part of the foreign exchange market), which was said by Donald Trump in an interview with an American publication in May 2015. At that time, this statement was not accepted by the market – too illusory was his victory. But now this position should be considered seriously, especially against the background of the trade war with China and the devaluation of the yuan.
After all, Trump does not say anything new – he just three years ago reasonably believed that an expensive national currency had a negative impact on the country’s economy, and especially – in the sphere of exports. I note that in May 2015, the dollar paired with the euro was trading in the range of 1.08-1.11, but this rate even then seemed overstated to Trump. The same can be said about the USD/CNY exchange rate-three years ago, the dollar against the Chinese yuan cost 6.1 – 6.2, while today the price range is completely different-6.7-6.8.
All this suggests that Donald trump will continue to react extremely sharply to the strengthening of the national currency. And since the Federal Reserve is the engine of the dollar growth, it will become the main object of criticism. However, the main question here is how will the Fed react to the voiced position of the US President? On the one hand, the Fed is an independent body that should not follow the opinion of politicians and officials, even of such rank as Trump. On the other hand, the Republican Jerome Powell – protege of the incumbent president, and not only in the current composition of the Fed – Donald Trump also made patronage and Vice-President Randal Quarles. By the way, both officials come from a large investment and consulting firm “the Carlyle Group”.
However, according to most currency strategists, the Fed “will not take under the visor”, changing the course of the monetary policy. Even the rhetoric of the Fed’s members certainly will not change – the regulator’s members will demonstrate independence from the White House. But still, the fourth rate hike was again in question-after Trump’s statement, the probability of this step slightly decreased – from 64% to 55%.
The fact is that almost all the members of the Federal Reserve in their speeches are hinting at “one or two increases” rates before the end of this year. According to them, everything will depend on the dynamics of key indicators, primarily inflation. This is a fairly standard position, when the regulator leaves “room for maneuver”, on the one hand, announcing its actions, but on the other hand – allowing the possibility of an alternative scenario. Therefore, if Trump still has an unofficial pressure on the Fed, the regulator will slow down the pace of tightening monetary policy “under the sauce” uncertain growth in inflation indicators.
And yet, according to most experts, the criticism of the US President will affect the foreign exchange market (rather than the Fed), as traders will react reflexively to any comments from Trump regarding the exchange rate of the dollar. Thus, any more or less large-scale strengthening of the dollar can be interrupted by criticism of the US President, who, unlike his predecessor, does not hesitate to comment on the exchange rate of the national currency.
From the technical point of view, the EUR/USD pair on the daily chart broke through the average line of the Bollinger Bands indicator and entered the Kumo cloud. The next resistance level is at 1.1785 – this is the top line of the Bollinger Bands on the D1. If the price is fixed above this level, the next destination will be the upper boundary of the Kumo cloud, which corresponds to the price of 1.1960. However, it is too early to talk about this altitude– at least until the July meeting of the ECB, which will be held this Thursday.