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Dollar Extends Declines as Trade Fears Ebb and Markets Eye U.S. Economy

Image © Commonwealth Office. Reproduced under CC licensing  

- USD extends losses on trade headlines, ahead of ISM data.

- After Bloomberg reports a U.S.-China deal is close - again.

- FX market fixated on trade headlines, with more seen ahead.

- But ISM services PMI also to impact USD in noon session.

- GBP/USD on a tear after clearing resistance at 1.30 level. 

The Dollar extended earlier losses Wednesday after fears for the U.S.-China trade talks were quelled by reported claims of progress from White House negotiators, although some strategists are warning of volatility ahead because fresh trade headlines could emerge at any moment. 

Currency markets were in reversal mode Wednesday as investors pared back some of the prior session's moves in response to a Bloomberg News report suggeting a December deal to at least temporarily end the U.S.-China trade war is still possible even after Tuesday's upset. President Donald Trump told reporters earlier this week that "it might be better to wait" until after the November 2020 presidential election to conclude the 'phase one deal' that was said to have been struck on October 11. 

There was little new information in the latest story beyond the claims of anonymous U.S. negotiators, who've reportedly said the trade talks are moving in the right direction and that a deal can still be be done before a December 15 deadline that will see all of China's remaining exports to the U.S. clobbered with tariffs. Negotiators have said that many times over and the U.S. has already covered most Chinese imports with punitive duties, damaging the world's second largest economy and roiling markets.

"Traders are getting taken for a rough ride in this headline-driven market as the dark clouds yesterday from Trump comments and a Chinese riposte this morning were suddenly parted by a Bloomberg article," says John Hardy, chief FX strategist at Saxo Bank. "Headline risk is extreme over coming sessions as we all know that Trump can do anything at any time."

Above: Dollar Index shown at daily intervals. 

President Trump and Commerce Secretary Wilbur Ross have both said repeatedly in recent days that the December 15 tariffs will go into effect if the October 11 'phase one deal' is not finalised and entered into by then. Trump also said Tuesday that there cannot be an "even deal" with China, which is not good news for Beijing because its mantra in the talks has always been that a solution to the dispute must be based on "equality and mutual respect" between the two. 

Tuesday's headlines sank emerging market currencies and put others including the Dollar under pressure too.

Those emerging market currencies recovered with the trade headlines Wednesday while many of the prior session's risers also furthered gains, translating into broad pressure on the Dollar index. However, and as much as some were doubtlessly buoyed by the Bloomberg story, price action comes with the market focus returning to the U.S. economy. 

"After a disappointing manufacturing survey, ISM services will enter the limelight. While this will be notable for tactical USD direction, we think a material disappointment is required to upset the apple cart - and compel a more nefarious break lower in USDJPY - ahead of payrolls this Friday," says Mazen Issa, senior FX strategist at TD Securities. "We look for a modest decline in the non-manufacturing index to a still firm 54.5 in November."

Wednesday's price action came just hours ahead of the 15:00 release of the Institute for Supply Management (ISM) non-manufacturing PMI PMI, which could stoke volatility later in the noon session given how the ISM's sister survey of the factory sector prompted a sell-off after disappointing the market on Monday. Consensus is looking for the services index to slip from 54.7. 

Above: USD/JPY rate shown at daily intervals. 

The U.S. economy has slowed this year as 2018's tax cuts have turned from tailwind-to-headwind as far as the annualised growth figures go and because the global economy has faltered again amid the ongoing trade war. That's already prompted the Federal Reserve (Fed) to cut interest rates three times and markets will be scrutinising Wednesday's ISM figures intensely for signs that the bank might have to cut again in the near future. 

Meanwhile, the Pound-to-Dollar had broken above psychological resistance at 1.30 and was marching higher still early in the noon session. There were few meaningful economic or election developments in the UK during the morning hours although the implied parliamentary majority for the Conservative Party following the December election, published by the Oddschecker website, rose from 66% to 70% during the session.

Pound Sterling has followed the implied majority and odds of a Conservative victory closely and for a number of reasons although some observers attributed the Pound's sharp gains to it having sustained a move above the 1.30 threshold that had barred its pathway higher for weeks. 

“While 1.30 is clearly a psychological threshold for GBPUSD, and has provided clear resistance in the last two months, arguably the consolidation above 1.28 is more important. With that as the floor, as it has been at various times in the last few years, the top end of the range actually takes us all the way up to 1.33/1.34. For that reason, I think 1.33 is the minimum to expect should Boris gain the majority," says John Goldie, an FX dealer at Argentex, a London Stock Exchange-listed payments specialist. “Yet, like with Theresa May before him, conspiring to lose an election from such a position of strength is not out of the question. It may seem like the political equivalent to Ronny Rosenthal vs. Aston Villa circa-early 90s, but missing an open goal, as the first YouGov MRP suggests it is, seems like an entirely feasible thing for Boris to do."

Readers can get the latest on the UK election, Brexit developments and their implications for the Pound here. 

Above: Pound-to-Dollar rate shown at daily intervals. 

 

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