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US dollar grinds subtly higher on hawkish Fed minutes

Summary:

  • Federal Reserve minutes sent the greenback slightly higher as a few members opted for a quicker pace of rate hikes
  • Geopolitical risks weigh on Asian stock markets even as Trump has refrained from striking Syria so far
  • Some harsh words flowing from the Chinese Ministry of Commerce on a trade spat with the US

The US dollar got a slight boost in the aftermath of the Federal Reserve minutes illustrating that members had seen a stronger economic outlook as well as increased confidence regarding reaching its inflation target, and therefore it would imply that "the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than it had previously expected". The minutes underlined risks stemming from economic overheating strengthening the case for the fourth rate hike this year. Having said that, one cannot forget that financial conditions in the US dollar have tightened substantially of late predominantly on the back of the spiking LIBOR which, at least partly, reflects a rate hike. From that point of view the Federal Reserve could be less prone to pull the trigger more than three times this year nevertheless traders have yet to dump the idea of four rises in 2018.

In terms of trade the document signalled that the steel and aluminium tariffs are unlikely to have a significant effect on the national economic growth albeit it warned that retaliatory steps taken by other countries would be global growth negative, and for that reason they see them as a downside risk. Finally it’s worth mentioning that some members discussed the possibility of a language change when it comes to an impact of monetary policy to economic activity. Therefore, they opted to acknowledge that monetary policy "would likely gradually move from an accomodative stance to being a neutral or restraining factor for economic activity". However, it does not seem to be something astonishing because everybody well knows that monetary policy keeps counterbalancing a boost from a fiscal side on balance a policy mix should be broadly neutral or even supportive of growth.

link do file download linkThe US dollar index (USDIDX on xStation5) climbed following the minutes bouncing off its important support. Although the long-term backdrop did not evolve too much, the buck could see a short-lived corrective to the upside from this point of view. If so, bulls could eye a 90 handle as their closest target. Source: xStation5

While the US dollar enjoyed the minutes Asian stock market did not as geopolitics took centre stage once again. Right now everything comes down to Syria (of course beyond a trade war) and a possible air strike conducted by the United States in retaliation for using a chemical weapon (Trump refrained from conducting an attact so far). Moreover, the UK Telegraph informed yesterday evening that UK submarines have been ordered to move within a missile range of Syria nonetheless PM Theresa May has yet to get an approval to attack Syria from the special Cabinet. As tensions mount Asian investors decided to take a step back dumping their equity holdings to some extent. Consequently, the Chinese indices have fallen roughly 0.5% each while a sell-off has been less severe in Japan or Australia.

On top of that, let us point to quite harsh remarks from the China’s Ministry of Commerce with regard to a trade battle with the US. It said that trade frictions have been sparked solely by the US side, and US actions have deviated so far from WTI spirit and rules. The Ministry underlined that market opening measures announced by Xi Jinping earlier this week was a China’s voluntary act and it had nothing to do with the ongoing spat. Finally it said that US actions were typical trade protectionism and unilateralism.

link do file download linkThe moment of truth for the NASDAQ (US100) as the index is trading just a shy of its supply area. If the price manages to break above it then a quicker move to the upside could be on the cards. Source: xstation5

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