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Dollar Slides as Trade Threats Deepen, FOMC and BoE Decisions Ahead

Dollar Slides as Trade Threats Deepen, FOMC and BoE Decisions Ahead

John Kicklighter, Chief Strategist

Talking Points:

  • The DXY Dollar Index slipped below support ahead of the FOMC, but this lacks for the full conviction of a break
  • Accusations by US President's top trade advisor of Germany devaluing Euro furthers global trade fallout
  • FOMC and NFPs ahead key event risk, but top event risk stands as a means to an end - an eventual sentiment trend

See the DailyFX Analysts' 1Q forecasts for the Dollar, Euro, Pound, Equities and Gold on the DailyFX Trading Guides page.

The Dollar extended its dive this past session - notably before the FOMC and January NFPs hit. Pressuring support and extending a trend in a market otherwise anchored by complacency is no small feat. This drive would not come through the traditional route. The Conference Board's US consumer sentiment survey slipped, but it does so from a remarkably high level. The catch-all explanation of Trump policy whiplash doesn't measure up between the most recent executive actions and the charge in speculation found via economic expectations. That said, President Trump's top trade adviser, Peter Navarro, hit the market where it has proven most vulnerable: deteriorating trade relations. His suggestion that Germany was devaluing the Euro for its own advantage via exports and that the country was the primary hurdle to a trade relationship with the EU creates palpable tension between the two most liquid currencies, represents an implicit threat of policies aimed at devaluing the Dollar and further threatens to destabilize the already fraying relations in the EU and Eurozone.

Projecting the next move for the US Dollar, the focus will shift back to scheduled event risk. The FOMC rate decision Wednesday is a media favorite. However, practical expectations of significant policy change are low. Having hiked at the last meeting in December, it would be a dramatic acceleration of pace from 12 months between hikes to subsequent meetings. Such a pace would also contradict the FOMC's own vow to move at a gradual pace. In the range of scenarios, a rate hike is a possibility, but the positive implications for the Dollar's yield advantage would quickly come under pressure from a stumbling risk backdrop fully faltering with the reality of a rollback in the speculative safety net. If the Fed follows the more restrained route of holding policy, the focus will turn to the policy statement which will be far more nuanced. Given the further release of NFPs just two days later, it would struggle to properly motivate.

Whether the focus is the FOMC or rapid economic and trade policy changes by the new President, these are catalysts to a deeper trend: sentiment. Whatever the motivator, the resultant speculative shift by the masses will divert the most capital and carry the prevailing trends. And, on that front, there is practical asymmetry when it comes to the views of risk appetite and risk aversion. As for other high profile event risk on the docket ahead, the Bank of England rate decision stands out amid sentiment surveys and PMIs. The comprehensive event will offer practical speculative traction, but true momentum will depend upon its ability to tap the Brexit thread. We discuss the busy three days ahead in today's Trading Video.

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