US-China Trade War Spoils the US Dollar Bulls Party
USD/Trade War News and Talking Points
- US President Trump says he may ’upset’ China on trade clampdown.
- German-US rate differential in excess of 320 basis points.
- ECB Press Conference may offer up EUR directional clues.
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US Dollar Kept in Check as US-China Trade War Escalates
A mildly hawkish FOMC meeting Wednesday left the market now looking for a total of four 0.25% interest rate hikes in 2018, boosting short-dated US Treasury yields. Any bullish US dollar feeling however was dampened by news that US President Trump is likely to ramp up trade tariffs on China, saying that he will confront China ‘very strongly’. A list of tariff targets is expected to be released at the end of this week and will likely be imposed in the near future. The aggressive rhetoric from the US towards the world’s second largest economy heightens trade tensions and is expected to produce a strong trade backlash from Beijing.
US Dollar Firmly Underpinned by EU-US Interest Rate Differentials
The USD is now firmly underpinned by rising short-term interest rates with the 2-year UST hitting a 2.60% peak post-FOMC. The differential between German 2-years and UST 2-years is now more than 3.2%, close to the spreads widest level in two decades. This yield differential, which is likely to continue to widen in the coming months, will feed through into EURUSD, pushing the pair lower as US dollar fixed assets become more attractive.
Will the ECB Produce a Hawkish Twist?
The ECB is expected to leave all policy measures unchanged at today’s meeting but expectations have been growing in the last month that ECB President Draghi may announce a timetable to end the central bank’s quantitative easing (bond buying) program. EURUSD has rallied on the back of these expectations, but with Euro-Zone growth starting to falter, inflation stubbornly below target and consumer sentiment and confidence dipping, Draghi is likely to make any announcement at the press conference (12:30 GMT) as vague and flexible as possible.
The latest IG Client Sentiment Indicator shows retail remain net-short of EURUSD but sentiment has changed over the past week.
EURUSD Daily Price Chart (July 2017 – June 14, 2018)
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--- Written by Nick Cawley, Analyst
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.