US president Donald Trump shakes financial markets
Supported by Jerome Powell optimism, the USD index hit its 12-month highs and could be stopped only by ...the White House’s leader. So did he! A usual US president would let the Fed address the issues of the US monetary policy, and would delegate the problems of foreign exchange market to the Treasury. But Donald Trump is not a usual president. He is going to make his mark with regard to the matters, none of his predecessors wanted to deal with.
The US president is not happy with the Fed’s willingness to hike the federal funds rate each time when the US economy expands. The US administration spares no effort to speed the US GDP up, and then, it is stabbed in the back by the central back, as it tightens the US monetary policy. Anyway, Trump will let the Fed continue the same policy. He speaks like a common person; the nation’s presidents shouldn’t say such things. Fortunately, the White House’s leader understands it. It’s wonderful that the financial markets understand it as well. During Donald Trump’s speech, the chances for four monetary restrictions in 2018 were down to 57%, from 61%, but then, they were back to the previous values. The same was with Treasuries yield, whose volatility hit its lowest level for at least a year, which increases the risk appetite and makes good environment for carry traders.
Dynamics of US Treasury markets
Source: Financial Times
During the last fifty years, there were at least two examples when the US administration, headed by Johnson and Nixon interfered with the Fed’s policy. Both cases ended up with uncontrollable inflation growth. The USA will face the same challenge as in the 1970s if the central bank stops monetary normalization in the situation when the US GDP rate is going to hit 4.5%-5%, consumer price index has already reached 2.9%, and the unemployment rate is stable close to its lowest level for a few decades.
Unlike the derivatives and the bond market, Forex response was far stronger. Donald Trump addressed the exchange rates as well, saying that strong dollar, compared to the drop of euro and yuan, challenges the USA. Say, strong dollar makes the US export more expensive in the global markets. In January, April and July, 2017, the US president also used verbal interventions, which, combined with other factors, sent the USD index down from the zone of its 13-year highs. And only when the greenback was weak in early 2018, the US president Trump stated he wanted to the US national currency to be strong. Obviously, Washington wants dollar to be stable. As, in addition to exporters, there is the US Treasury that needs to raise $1.1 trillion before late March, 2019, and if foreign investors start worrying about devaluation, it will be a hard job.
EUR/USD bulls got use of the situation and went for a counter attack. The successful storm of the resistance at 1.168-1.169 makes euro more likely to go on towards figure 18 base.
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Price chart of EURUSD in real time mode
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