Market Drivers August 21, 2018
Euro Retakes 1.1500
USDJPY holds 110.00
Nikkei -0.09% Dax 0.48%
Europe and Asia:
GBP UK PSNB -2.9B vs. -2.1B
President’s Trump jawboning of the dollar had a follow-through effect in Asian session trade taking EURUSD back above 1.1500 level that verticalized the pair is stop fueled move.
Yesterday’s reports which suggested that Trump was upset with Fed Chair Jerome Powell for pushing higher rates and tightening credit conditions had an immediate effect on the greenback which weakened across the board in afternoon New York trade and continued to fall through Asia trade. Although Mr. Trump has little influence over Mr. Powell directly, his goal of more favorable trade position for US clearly requires a weaker dollar. Indeed much of the intended effect of the tariffs may have been offset by the strengthening of the dollar over the past several weeks and Mr. Trump is clearly frustrated by Mr. Powell’s policy which is at odds with the President’s economic intentions.
The euro responded to Mr. Trump’s remarks the most, staging a massive short covering rally that lifted it nearly 150 pips from yesterday’s session lows. The pair was grossly oversold and CFTC positioning indicated that the specs have turned net short for the first time in months. Therefore a squeeze was due, but it remains to be seen just how far this rally can go. As we noted yesterday, the EZ faces problems of its own, as demand in the region slows and Italy is looking to bust its budget in order to allocate massive spending on crumbling infrastructure. Although Mr. Draghi is eager to normalize monetary policy, he is also pragmatic enough to understand the risk of tightening and the ECB may go through a series of false starts and stops just as the Fed did before commencing normalization in earnest.
As to the Fed, there is little indication that FOMC officials are listening to the President as rhetoric from monetary authorities remains consistently hawkish and that’s likely to keep the anti-dollar capped for now with GBPUSD topping out at the 1.3000 level and EURUSD at the 1.1700 figure.
With no data on the docket, attention will turn Mr. Trump twitter feed with traders looking to see if he adds gasoline to the fire by making further remarks about the dollar exchange rate. The short squeeze of late dollar longs has caught the market by surprise, so any further catalyst could take the EURUSD through the 1.1600 figure as the day proceeds.