US Dollar Rally May Regain Momentum Amid Trade War Worries
FUNDAMENTAL FORECAST FOR THE US DOLLAR: BULLISH
- US Dollar rally stalls as markets shrug off trade war worries
- Growing tensions may revive haven demand in the week ahead
- US GDP revision, PCE data may not trigger strong response
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Last week, haven demand lifted the US Dollar amid worries about the escalating trade tensions as expected. The move higher would prove short-lived however. The currency touched an 11-month high against an average of its top counterparts only to retreat and close the week essentially flat.
Traders appear willing to overlook growing tensions between the US and its top trading partners for now. Perhaps they have reasoned that bellicose tactics employed by President Donald Trump will yield to deal-making before long, echoing recent rapprochement with North Korea after months of intense sparring.
That seems fanciful. The targets of Mr Trump’s ire are not as likely as Kim Jong-un to trade a media coup for nominal de-escalation. Officials in Canada and the EU must demonstrate strength to the own electorates, and China possesses retaliation levers that Pyongyang does not.
Background - A Brief History of Trade Wars, 1900-Present
Friday marked implementation of retaliatory EU tariffs responding to a hike in US duties on aluminum and steel. President Trump threatened to up the ante via Twitter, saying a 20 percent levy on cars imported from the region would soon follow if the regional bloc does not back off.
EU leaders gathering for a summit next week may unveil wider-reaching countermeasures as Mr Trump digs in. Preliminary meetings between German Chancellor Merkel and French President Macro as well as her coalition partners may offer a steady stream of soundbites keeping trade wars in the headlines.
Meanwhile, China has hinted via official news outlets that it will aim its response to US trade barriers at blue chip corporates. The goal is to inspire their considerable lobbying efforts to be directed at nudging the President to soften his stance.
A report from the US Treasury department outlining investment restrictions and export controls on Chinese investment in strategic technologies and industries may well spur Beijing into action. It is due by week’s end but the famously vocal and hyperactive Mr Trump may opt to lock horns on the matter earlier.
All this suggests that safety-seeking capital flows may soon re-energize the greenback. As jousting continues to play out in the public eye, the markets may find it hard to ignore the threat that serious disruption of mainline supply chains poses for global growth.
On the data docket, revised first-quarter GDP figures and the Fed’s favored PCE inflation gauge are on tap. Absent improbably dramatic deviations from consensus forecasts, these are unlikely to alter the expected path of monetary policy and might fade into the background as trade wars take center stage.
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--- Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.