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Tuesday AM: GBP Boosted by Trump Comments but Eyes Brexit Talks | USD Slides Following Trump Attack on Fed | EUR Lifted by Trump Comments as Economic Surprise Indices Converge

-USD weakens broadly, GBP and EUR rise on Tuesday.

-After Trump criticises Fed, China and European Union.

-EUR/USD could be in early stages of turn for the better.

© Shealah Craighead, The White House

The Dollar fell Tuesday after President Donald Trump lashed out at the Federal Reserve for its recent approach to US monetary policy, which enabled other currencies to get the better of the greenback in the overnight session.

In a Reuters interview, Trump said he is "not thrilled" his choice of Fed chair, Jerome Powell, has continued to raise interest rates since taking the bank's top job in February. And he also claimed the EU and China are manipulating their currencies. 

Trump has made no secret of his desire for a weaker Dollar and has previously said he is not a fan of high interest rates, which make his agenda of boosting the US economy more difficult to implement.

"It looks as though these comments have caught market very long dollar after last week’s EM rout. But are they enough to turn the bull trend? Probably not – unless it looks like the Fed has independently assessed that there has been an unwarranted tightening of financial conditions and want to slow the pace of rate hikes. We’ll hear more from the Fed later this week," says Chris Turner, global head of FX strategy at ING Group.

The Fed has raised interest rates seven times since the end of 2015, including twice in 2018, taking the Fed Funds rate range to between 1.75% and 2%. Many economists expect it to raise rates so the top end of that range hits 3.25% around the end of 2019.

Trump also claimed Tuesday that both China and the EU are keeping their currencies artificially weak. A weak currency improves competetiveness in trade terms by making export goods cheaper for overseas customers to buy. He has previously threatened to declare China a currency manipulator, which is a designation that could see it clobbered by sanctions and fresh tariffs.

US, Chinese and EU officials have been at loggerheads over international trade of late, with the White House levying new tariffs on metals exported from the EU to the US and on more than $250 bn of Chinese exports to America.

"While the ECB is not directly manipulating its currency, you have to have some sympathy here for President Trump given the ECB continues with QE and negative interest rates despite the inflation rate sitting above the ECB’s target at 2.1%," says Derek Halpenny, European head of global markets research at MUFG. "Speculation that the Chinese authorities may be about to re-adopt the ‘counter-cyclical’ factor into the daily calculations of the CNY fixing means President Trump may have a point on China also."

The US is currently in negotiations with Beijing and Brussels aimed at curbing the former's frosty approach to foreign companies operating in China, and addressing the imbalance between Euro area and US trade tariffs.

The tariffs that preceded the talks have seen markets grow uneasy this year as many analysts fear they will lead to an economic slowdown in China and further afield. These fear, and superior levels of US growth, have helped maintain a bid for the US Dollar in recent months

The greenback has risen almost 8% in the last six months. Dollar strength was the main driver behind a 9% decline in the Pound-to-Dollar rate and 8% decline in the Euro-to-Dollar rate over the same time period.

The US Dollar index was quoted 0.25% lower at 95.49 during early trading Tuesday. The Pound-to-Dollar rate was 0.24% higher at 1.22834 and the Euro-to-Dollar rate was 0.26% higher at 1.1521.

 

GBP Boosted by Trump's Attack on Fed but Eyes Brexit Talks

The Pound rose broadly against many of its rivals Tuesday but particularly the Dollar as markets sold the greenback en masse in response to President Trump's attack on the Federal Reserve. 

However, with negotiators from the UK and EU set to update the market on the Brexit front Tuesday, there is scope for more warnings of about the supposedly-rising possibility of a "crash out Brexit" to weigh on the Pound later in the session.

The number of government ministers making pronouncements on the perceived dangers of a so called "no deal Brexit" has risen sharply during recent weeks.

"Just prior to the summer recess, the sentiment surrounding Brexit was pretty negative," says Halpenny. "That poor sentiment and substantial Brexit risk premium is unlikely to change and could even get worse over the short-term given the UK government is set to release 84 no-deal preparation notices. With only eight weeks until we reach the self-imposed deadline for a withdrawal deal to be finalised, downside risks will persist."

Many expect Prime Minister Theresa May will have to make further concessions to the EU before Brussels becomes willing to declare itself satisfied with the withdrawal negotiations.

Such concessions would merely add to existing domestic political pressures given the spate of government resignations sparked by the PM's "Chequers Plan". As a result, domestic politics are expected to weigh heavily on the Pound over coming months.

 

Euro Lifted by Trump as Economic Surprise Indices Converge

The Euro rose broadly on Tuesday as markets responded to President Trump's criticism of the Federal Reserve by offering the greenback lower and piling into other currencies instead. 

This was despite Trump also claiming the EU has been manipulating its currency. And there is scope for the single currency to continue higher over coming days, particularly if Thursday's August manufacturing and services PMIs show continental growth picking up toward the end of the third quarter. 

"There has been some convergence in the economic surprise indicators of the US and the Eurozone which could be EUR/USD supportive. And a break of 1.1530 could carry EUR/USD to 1.1600 in thin markets – but as noted above a sustained turn-around in the bear trend probably requires a less hawkish Fed or a surprisingly upbeat ECB - neither of which seems imminent," says Turner.

Slowing economic momentum has weighed on the Euro in 2018 after quarterly GDP growth fell to 0.4% in the first quarter, down from 0.7% at the end of 2017, and held this pace during the three months to the end of June. This has seen financial markets push the date at which they expect the European Central Bank to start raising its interest rate further off into the future. 

Meanwhile, superior levels of economic growth have enabled the Federal Reserve not only to meet its inflation target in 2018, but also to go on raising its interest rate at a time when the monetary policy outlook elsewhere in the world has been deteriorating. This has lifted the Dollar and weighed on the Euro, leading to a 3.9% 2018 decline for the Euro-to-Dollar rate. 

"EUR/USD [could] break back above 1.16 now that positioning data suits our long-term bias but really, President Trump jaw-boning isn't a sensible reason for it to happen. A shift in the EU/US relative economic surprise indices is a better reason, and there are signs that's happening, but at the risk of sounding like a very broken record, higher Bund yields are a precondition for euro strength because they would be a clear sign that markets are beginning to believe in ECB normalisation again," says Kit Juckes, chief FX strategist at Societe Generale

 

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