Markets felt cheated, demand for safe-heaven assets increased, and so EUR/USD bulls couldn't consolidate above 1.14 

Only he who does nothing never errs. However, it should be born in mind that the higher is your office the worse are your errors. If the U.S. president wants the dollar to go down and the US stocks to go up, he shouldn’t change the tariffs. The U.S. stock indexes have featured the most dramatic crash since October. It mostly resulted from Donald Trump’s comments that the import duties will increase the U.S. economic power, and the amount will increase if there is no real deal with China. The market felt cheated as after the summit in Buenos Aires it expected that U.S. -China trade conflict would be settled down.

Each side has its one view on the trade war. And on the truce. The U.S. media were writing about 90-days countdown, China’s promises to reduce tariffs on the U.S. car imports and substantially increase purchases of the U.S. products. The Chinese media only reported that the U.S. wouldn't increase the tariffs. Only a day after, the China's commerce ministry reported about the negotiations within 90 days. Donald Trump’s tweets are the evidence that Washington takes a firm stand, and the statements that the tariffs will max out the U.S. economic power look ridiculous. A part of them will be paid by the U.S. consumers. And their total effect is much lower than the budget losses, resulted from the tax reform.

Investors are rather sensitive to the uncertainty, that is why the swings of the U.S. stock indexes shouldn’t be surprising. According to the U.S. Treasury Secretary Steven Mnuchin, the market should wait and see: whether the deal will be reached within 90 days or not. Growing uncertainty hypothetically results in increased volatility, and it supports safe-heaven assets.

Dynamics of forex volatility

Source: Bloomberg

Growing risks of the U.S. yield curve inversion also pressed the S&P 500 down. The index is down to the lowest level since June 2017. It used to quite accurately signal the U.S. economic recession with a time lag of 12-18 months. Investors are really concerned about a slowdown in the US GDP growth, and the Fed’s policy is thought to be too tight. The markets are confident in the federal funds rate hike in December, but they have strong doubts in what will be next. After all, the politicians are taking advantage, depriving the central banks of the former authority. Before Donald Trump’s coming to power, investors were exited by such phrases as “quantitative easing program”, “ultra-low interest rate”, “direct supervision”. In 2018, they are focused on such notions as “protectionism”, “populism”, “nationalism”.

I don’t think that the U.S. president’s tough rhetoric will have a long-lasting effect. The sides are going to negotiate. It is a fact. Everything else is just talks. EUR/USD hasn’t been consolidated above figure 14 base. It seems to result from dollar purchases ahead the release of the US employment data. Investors are pricing positive in the dollar pairs in order to sell on the facts.

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Price chart of EURUSD in real time mode

Dollar got into a perfect storm

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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