So Powell shrugged off Trump’s aversion to rate hikes. Will this mean recovery for the dollar this week?
While the U.S. has other higher-tier reports on tap this week, one data release is more anticipated than the rest:
Preliminary GDP (Aug. 29, 12:30 pm GMT)
The preliminary release is the second in the three-part series of the GDP report.
In the advanced version printed in late June, we found out that the economy had grown by an annualized rate of 4.1% in Q2 2018.
While it marked the fastest reading since 2014, it also missed analysts’ expectations of a 4.1% improvement.
Of course, it also didn’t help that the Donald himself raised our expectations by hinting that we’ll see a strong reading days before the report’s release.
This week market geeks expect the 4.1% growth to get downgraded to 4.0%. Significant upgrades or downgrades from the initial reading could make or break the dollar’s intraweek trend, so make sure you stick around during the release!
Last Week’s Price Review
The Greenback is currently on track for its second week of losses since the Greenback is presently trailing behind at second-to-last place (as of 5:00 pm GMT).
The Greenback’s price action this week can basically be summarized as two days of selling pressure, followed by three days of attempting to recover from the early losses.
And the Greenback weakened right from the get-go, partly because of Trump’s comments against the Fed.
As for specifics, a Wall Street Journal (WSJ) report claimed that Trump supposedly told donor at a fundraising event last Friday that “he is unhappy with the Federal Reserve’s recent moves to raise interest rates and raised doubts about the man he placed in charge of the institution, Jerome Powell,” as the report puts it.
This was followed by a Reuters interview that appeared to validate the WSJ report since Trump said during the interview that:
“I’m not thrilled with his raising of interest rates, no. I’m not thrilled.”
Backtracking a bit, I said (or wrote, to be more precise) that Trump talking smack about the Fed is only part of the reason for the Greenback’s slide. And that’s because the Greenback was actually already encountering sellers before the WSJ report was even released, as you can see in the chart above
There was no apparent catalyst for that, but it’s possible that last week’s theme was still playing out, namely unwinding of safe-haven bets on the U.S. dollar ahead of the trade talks between the U.S. and China.
Moving on, the Greenback continued to slide lower (except on USD/JPY) and market analysts continued to blame the Greenback’s slide on Trump’s criticism against the Fed.
However, price action also reveals that other Trump-related updates were beginning to attract attention, since the Greenback received a fresh influx of sellers when rumors began to fly that Michael Cohen, Trump’s ex-attorney, was going to make a plea deal.
And as it later turned out, those rumors were true since Cohen did enter a plea deal. Cohen didn’t really name Trump, referring only to an “unnamed candidate”.
However, Lanny Davis, Michael Cohen’s lawyer, began making the media rounds and launched a frontal assault against Trump by directly naming Trump and basically calling Trump a criminal.
— Morning Joe (@Morning_Joe) August 22, 2018
"Would Michael Cohen seek a pardon from the President of the United States for any of this?" CNN's John Berman asks.
"The answer is definitively no," Lanny Davis says, claiming that Cohen has questioned Trump's suitability for the presidency and "loyalty to our country" pic.twitter.com/3aHDZ1x47O
— CNN Politics (@CNNPolitics) August 22, 2018
The Greenback eventually got a chance to lick its wounds when Wednesday’s U.S. session rolled around, likely because of short-covering ahead of the FOMC minutes.
And when the FOMC minutes were released, the Greenback initially reacted negatively before quickly regaining its footing.
Forex Gump has the deets, so read his 4 Takeaways From The August FOMC Minutes, if you want the specifics.
The gist of it, though, is that the Fed expressed some concern about trade, which is likely why the Greenback weakened slightly as a knee-jerk reaction. However, follow-through selling was limited despite the ongoing political drama because the minutes signaled a potential rate hike by September when they noted that:
“Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation.”
The minutes also had a hawkish overall vibe and even hinted that the Fed may be “planning to switch from a supportive role (for a weak/recovering economy) to a more restraining role (for a growing economy that may overheat),” as Forex Gump puts it, because “many” Fed officials wanted to change the Fed’s characterization of its monetary policy stance.
Focus then shifted back to U.S. political drama since the Greenback’s rally stalled ahead of Trump’s interview with FOX & friends. And when the interview finally went underway, the Greenback got a final bearish kick.
“Later on I knew. Later on."
On @foxandfriends, @POTUS said that "later on" he knew that former attorney Michael Cohen made hush-money payments to adult-film star Stormy Daniels and Playboy model Karen McDougal, and insisted the money did not come from campaign funds. pic.twitter.com/nChRG2VhVl
— Fox News (@FoxNews) August 23, 2018
The fallout from the interview was only limited, though, since trade talks between the U.S. and China came into focus, which likely spurred safe-haven demand and/or speculative flows for the Greenback since Trump said earlier in the week that:
“I don’t anticipate anything coming out of it [trade talks].”
And as expected, trade talks were wrapped up without making any significant progress, so market players who opened preemptive positions likely decided to take some delicious profits off the table.
Some traders who rushed to the Greenback because of political uncertainty in Australia also likely decide to unwind their positions since the Greenback began to encounter even more sellers. And it didn’t help that risk-taking got revived on Friday, which likely dampened safe-haven demand for the Greenback.
And as a final parting shot, the Greenback got whupped when Fed Chair Powell spoke at Jackson Hole, likely because of these comments:
“The FOMC has been navigating between the shoals of overheating and premature tightening with only a hazy view of what seem to be shifting navigational guides.”
“[W]hy isn’t the (Federal Open Market Committee) tightening monetary policy more sharply to head off overheating and inflation? With no clear sign of an inflation problem, why is the FOMC tightening policy at all, at the risk of choking off job growth and continued expansion?”
“I see the current path of gradually raising interest rates as the FOMC’s approach to taking seriously both of these risks.”
That’s a convoluted way of saying that he doesn’t see a risk of an overheating U.S. economy, so he advocates an approach of hiking rates slowly, which is a bit dovish and kinda contradicts the FOMC minutes.
If you can remember what you read not too long ago, I noted that “many” Fed officials wanted to change the Fed’s characterization of its monetary policy stance, which implies that the Fed may be “planning to switch from a supportive role (for a weak/recovering economy) to a more restraining role (for a growing economy that may overheat),” as Forex Gump puts it.
Well, what Powell is saying here is that he’s not one of the “many” Fed officials, which is likely why the Greenback got slapped lower.