Tariff updates weighed on the Greenback for most of the week last week. Will the dollar extend its losses this week?
Let’s take a look at the potential catalysts:
FOMC statement and projections (Sept. 26, 6:00 pm GMT)
As of last Friday, CME futures predicts a 94% chance that the Fed will raise its interest rates by another 25 basis points, bringing the central bank’s rates to its highest since April 2008.
And that’s the least exciting part of the event. Take note that the FOMC will also print its growth, inflation, and employment projections until the year 2021. What’s more, Governor Powell will also hold a presser after the statement’s release!
All eyes will be on how Fed members will approach their policymaking beyond the year.
See, many are worried that the Fed’s regular rate hikes risks choking the economy’s momentum. On the other hand, others are concerned that the Fed isn’t tightening fast enough and that the economy would actually overheat if the Fed doesn’t step up its game.
If Powell’s Jackson Hole speech was any clue, the Fed head honcho is putting his faith in GRADUAL rate hikes as the best way to move forward.
We’ll know more about Powell’s biases later in the week, but for now, just remember not to discount any volatility that might come from pre-release speculations and even profit-taking after the highly-anticipated event.
Market risk sentiment
Thanks to milder-than-expected tariff announcements from the U.S. and China, market bulls came out to play and bought assets that have higher yields than the dollar.
But that was last week. This week the two economic superpowers are scheduled to implement their latest tariff plans and, word around the hood is that China has taken back its RSVP to U.S. Treasury Secretary’s invitation for another round of trade-related talks in Washington.
Will we see further escalation in the U.S.-China trade war? More importantly, how will news updates affect the dollar’s price action?
Last Week’s Price Review
The Greenback is currently the second biggest loser this week (as of 5:00 pm GMT), which is a repeat of last week’s disappointing performance.
The Greenback’s price action looks messy, but if we strip USD/JPY and USD/CHF from the overlay, then we get a clearer picture.
Anyhow, the Greenback had a weak start. And as noted in Monday’s Asian session recap, that’s because of news over the weekend that the U.S. may announce another round of anti-China tariffs on Monday, as well as news that China may abandon trade talks if the U.S. does impose fresh tariffs.
The Greenback’s weakness then intensified during Monday’s London session. And that was apparently because of Chinese Foreign Ministry Spokesperson Geng Shuang’s warning that:
“[I]f the US introduces any new tariff measures to China, China will have to take necessary counter-measures and resolutely safeguard our legitimate rights and interests.”
More USD bears also came out of the woods when Trump tweeted the following:
Tariffs have put the U.S. in a very strong bargaining position, with Billions of Dollars, and Jobs, flowing into our Country – and yet cost increases have thus far been almost unnoticeable. If countries will not make fair deals with us, they will be “Tariffed!”
— Donald J. Trump (@realDonaldTrump) September 17, 2018
The Greenback would finally get a chance to lick its wounds when the U.S. announced a fresh round of tariffs, likely because of short-covering.
However, only a 10% tariff was imposed on around $200 billion worth of Chinese goods, but will be eventually increased to 25% by the end of the year.
The announcement therefore wasn’t as severe as expected since the market was expecting that a 25% tariff will be imposed from the get-go, so the Greenback began to encounter sellers again as risk sentiment improved.
The Greenback then had a mixed reaction to China’s retaliatory tariffs, but sellers were winning since China only slapped 5-10% in tariffs on around $60 billion worth of U.S. goods, contrary to expectations for a tit-for-tat response.
And more Greenback sellers would emerge when Trump gave a speech since Trump likely helped to ease trade-related jitters when he said the following (emphasis mine):
“So we’ll see what happens. But we’re making a lot of headway with China. China wants to come over and talk, and we are always open to talking.”
Even more USD bears were enticed to attack when Chinese Premier Li Keqiang said that (emphasis mine):
“One-way devaluation will do more harm than good to China’s economy. China will by no means stimulate exports by devaluing the yuan.”
After that, easing trade-related concerns on hopes that the U.S. and China will settle their differences became the dominant narrative, sending global equities higher, supporting the higher-yielding currencies, while also sapping demand for the Greenback.
The same theme then continued to play out on Thursday since there were no fresh negative catalysts for the Greenback, but the Greenback just kept on sliding (except on USD/JPY).
The Greenback would finally get a chance to lick its wounds on Friday. There were no apparent catalysts, but market analysts were attributing the Greenback’s recovery to short-covering.
The damage was already done, though, so the Greenback is turning in another poor performance this week.