The US president criticizes the Fed again
When a people fail to do something, they begin to look for the guilty. Donald Trump resumed criticizing Jerome Powell, saying that there is a gentleman who likes “likes raising interest rates” and “a very strong dollar”. The president doesn’t mind the strong greenback, but not too strong to set back the US companies, doing business with foreign partners. “Can you imagine if we left interest rates where they were, this would lead to a little bit lower dollar”, Trump wonders why they should hike the rate if “essentially there’s no inflation”. The markets took the bait right away. This has happened more than once before, however, there is an opinion that the US president may resort to particular actions in March.
A search for a fall guy starts looking reasonable, if you take a look at the US foreign trade. Net export subtracted 0.2% from GDP in 2018, that is, it didn’t allow the US economy to expand by 3%, as Trump had promised. At the end of 2018, the US foreign trade deficit expanded from $859 billion up to $914 billion, breaking through the record of $905 billion, set in 2006. The indicator has been 16% up since Trump became the president. It is an obvious disappointment for a man, who is trying to reduce it by means of import tariffs. Even if the main reason for the deficit was the fiscal stimulus that allowed to boost import, but tightening of the Fed policy resulted in the dollar revaluation and set the US exporters back.
Donald Trump’s statement about no inflation is arguable. Although the personal consumption expenditures price index was 1.75% up in 2018 and has failed to meet the 2% target for the eighth consecutive year, the core PCE was up by 0.19% M-o-M in December, 2018, which is the best performance since May. On an annual basis, the indicator has increased (+1.94%) at the highest pace since 2011.
The US president’s renewed criticism of the Fed has made hedge funds doubt in correctness of the choices made. According to Citi analysis, after the massive sales of the US dollar in the December-January period, speculators are lured back to it.
Dynamics of the USD spot rate and speculative positions for the US dollar
I personally think Donald Trump to be a man, who achieves his goals. Although the GDP growth hasn’t met 3% rate, promised by Trump, and foreign trade deficit is the widest, it must be admitted that the US economy has almost reached the target growth, and protectionism resulted in the US-China trade talks. They are about to reach an agreement, which should suggest in one of the paragraphs that China should reduce import tariffs on the US agricultural products.
On the other hand, if one sells the dollar, then what to buy instead? A decline in the euro-area core inflation to 1% Y-o-Y in February makes Mario Draghi more likely to sound dovish at the ECB meeting in March and presses the EUR/USD down. Bears are going to storm the support at 1.135. If they succeed the pair will be more likely to decline to the bottom of the consolidation range of 1.125-1.15.
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