This may be the most important month of trading for the U.S. Dollar in 2018. Between the last FOMC announcement on September 26 and the next statement on November 8, the U.S. Dollar has plenty of catalysts for its next big move higher or lower.
This period includes two U.S. employment reports, the U.S. mid-term elections, ongoing Brexit negotiations, trade wars and the normal slate of economic releases.
With all this activity, it’s a great time to be a currency trader. But it can be easy to lose the forest for the trees and miss the big picture. So here are three questions that will drive prices in the next month.
1. Will President Trump “win” the trade wars?
President Donald Trump is not one to accept defeat. So, if it becomes clear that he will not be able to win the trade wars by renegotiating trade with Canada or getting significant concessions out of Chinese leaders, he may turn to the one thing he feels he can control: the U.S. Dollar.
President Trump understands the important role that currency valuations play on trade, and he may instruct his administration to do what it can to talk the Dollar down. And in the past, that has had an impact.
Before his inauguration in January 2017, as EUR/USD parity talk was at its highest point in a decade, President-elect Trump said that the Dollar was “too strong.” That comment preceded a year-long decline in the currency that took EUR/USD from 1.05 to 1.20.
Not only was that move impressive for its size, but also because it came in the face of the Federal Reserve hiking interest rates, a move that is typically Dollar-positive.
Then, this year, President Trump’s Treasury Secretary, Steven Mnuchin, became the first secretary in more than two decades to tout the benefits of a weak Dollar.
At Davos in January, Secretary Mnuchin said that a weaker Dollar is “obviously” good for U.S. trade. (Previously, Treasury secretaries since the mid-1990s have stuck to a line that a strong Dollar is in the national interest.)
That comment was at the heart of the Dollar’s Q1 decline, which saw EUR/USD rally from 1.20 to 1.25.
2. Will the U.S. mid-term elections disrupt economic growth or the Trump deregulatory agenda?
If the 2016 elections taught us anything, it is that it is important to divorce your feelings on U.S. politics from your trading. This can be particularly tough given how polarizing these elections may turn out to be, but will be important if you hope to profit.
Most analysts are expecting Democratic gains in the U.S. Congress, with Democrats likely taking control of the U.S. House of Representatives. The real question then is what it might do to economic growth and President Trump’s deregulatory agenda.
If there’s one thing the Federal Reserve dislikes, it is uncertainty. And given the recent path of interest rates, increased uncertainty can cause the market to question whether a December rate hike is guaranteed. Looking beyond December, uncertainty could imply that in 2019, the FOMC will be more cautious than is currently believed.
3. Will Europe and Britain be able to negotiate a soft Brexit?
In Europe and Britain, the next month will be critical as well as the two countries work to hammer out details for Brexit.
The EU Summit on October 18-19 has been largely seen as one of the last opportunities for the two parties to reach an agreement in principle, though there is also an emergency EU Summit that could happen in November if more time is needed.
All of this is ahead of the December 13 European Council meeting — a time many believe could be the last date for an agreement to be signed by both Europe and the U.K.
Outside of those events, I would expect news to break any and every day. Over the past month, we’ve seen more and more comments coming out of Europe and the U.K. about the status of talks as we get closer to these deadlines.
Thus far, any news that implies that the talks are going less well than expected has pressured the British Pound. Look no further than the 200-pip decline on September 21 as evidence of that.
Conversely, news that talks are going well like happened throughout mid-September, results in a GBP/USD rally. During that time, the Pound regained the 1.30 handle and rallied to near 1.33.
There are a number of possibilities for how these (and other) questions will turn out. The only fact that remains is that the next month is going to be one that could shape the next big move in currency trading.