Tue, Jan 31, 2023 @ 23:19 GMT
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Currencies: Trade War Angst Continues To Weigh On The Dollar

Sunrise Market Commentary

  • Rates: Cohn’s resignation vs hawkish comments by Fed Brainard
    The US Note future gapped open higher overnight on White House economic adviser Cohn’s resignation and on rumours of more US tariffs against China. The move is countered by a shift in tone of dovish Fed governor Brainard who favours a faster rate hike cycle than before. Tomorrow’s ECB meeting could subdue today’s session.
  • Currencies: trade war angst continues to weigh on the dollar
    Today, uncertainty on the US trade policy will remain the key factor for global FX trading. For now, the issue is a negative for the dollar. At the same time, Fed speak and US eco data stay USD supportive, but are ignored for now. FX traders will also look forward to tomorrow’s ECB meeting. Will the ECB be soft enough to prevent further EUR/USD gains?

The Sunrise Headlines

US stock markets closed up to 0.5% higher (Nasdaq) yesterday. Risk sentiment deteriorated overnight after economic adviser Cohn’s resignation and on rumours of more US tariffs against China.

Gary Cohn will resign from the White House as President Trump’s top economic adviser, days after Mr. Trump surprised his senior staff by announcing steel and aluminum tariffs that Mr. Cohn had opposed.

Washington-based Fed governor Brainard; one of the central bank’s most ardent doves, sounded optimistic about the US economy’s outlook and suggested the pace of monetary policy tightening may need to accelerate.

The Trump administration is considering clamping down on Chinese investments in the US and imposing tariffs on a broad range of its imports to punish Beijing for its alleged theft of intellectual property, according to sources.

Opponents of Brexit are looking into whether Britain could postpone its exit from the EU to give lawmakers and voters more time to weigh up whether they really want to leave.

Australia’s economic growth slowed last quarter (0.4% Q/Q) as bad weather hit exports, though government spending and a revival in household consumption helped the country extend its 26-yr run without recession.

Today’s eco calendar contains US ADP employment. Fed Bostic and Dudley are scheduled to speak and the Fed releases its Beige Book. The Bank of Canada is expected to keep policy rates unchanged at 1.25%. Germany taps the market.

Currencies: Trade War Angst Continues To Weigh On The Dollar

Trade war debate continues weighing on USD

Yesterday, USD dollar selling eased temporary as markets hoped that senior Republicans could convince Trump to avoid a trade war. Around noon, South Korean officials declared that North Korea was prepared to talk about denuclearization. Risky assets jumped and so did USD/JPY and EUR/JPY. The EUR/JPY short-squeeze also propelled EUR/USD above the 1.24 level. Later in the session, the decline of the yen slowed as markets tried to assess the meaning of the Korean headlines. USD/JPY closed the day at 106.13. EUR/USD finished at 1.2414.

Overnight, Gary Cohn announced to resign as President Trump’s top economic adviser. He disagrees with Trump’s foreign trade policy. The announcement revived the risk-off trade. Fed Brainard (a dove) hinted that tailwinds to the economy could lead to a faster rate hike path. However, the focus for (FX) trading remains on US trade policy as US president Trumps still intends to defend US interests by protectionist measures. USD/JPY dropped to the mid 105 area. EUR/USD is hovering near 1.2425 even as EUR/JPY came off yesterday’s top.

The US trade balance and the ADP labour market report will be published today. Several Fed members speak and the central bank publishes the Beige Book. Of late, most Fed members, even the doves, were optimistic on growth and US data were OK. In theory, this is USD supportive. However, the market’s focus is on the US trade policy. The ‘trade issue’ is weighing on the dollar, but tomorrow’s ECB meeting is also in play. We expect the ECB to make only limited changes to its communication (if any) as inflation stays low. However, will a ‘soft‘ ECB be enough to prevent further EUR/USD gains, as the dollar stays under pressure? For now, we assume the ECB to be soft enough for EUR/USD to hold the 1.2155/1.26 trading range. Of course, US political event risk makes the dollar vulnerable short-term.

Yesterday, there was plenty of diplomatic action between EU and UK policy makers at different levels. However, for now, there is no break-through on key pending issues. Especially financial services are a hot topic. This debate will probably continue today as the EU is expected to publish its starting text for the next round of the negotiations. EUR/GBP hovers near 0.8930/50 resistance. Swings in EUR/GBP remain modest, but the day-to-day momentum of sterling is again deteriorating.

EUR/USD rebounds higher in the consolidation range as US trade policy weighs on the dollar.

KBC Bank
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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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