Fed, not Trump, primary driver for greenback

As if the start of a new month isn’t congested enough with economic data, the market has also been left to contend with last night’s Congressional address from Donald Trump and hawkish comments from the Federal Reserve, too. Off the back of this potent combination, we’ve already seen a wave of reactions across multiple asset classes, and the volatility is likely to be sustained during the day ahead. Treasury yields are gaining, whilst the DOW – which broke with its record breaking run higher yesterday – is also set to resume its foray into previously uncharted territory.

The Traders’ View

Our Prop desk has taken a mix of Euro positions, with the majority being short although there’s some enthusiasm for EUR/JPY emerging. We also have some fresh shorting of equity indices, although attention here is very much focused on Europe rather than the US.

Fundamentals – Fed, not Trump, primary driver for greenback

The dollar has posted some modest gains over the last few hours, but by all accounts it was the hawkish comments form the Federal Reserve reigniting prospects of a March rate hike - rather than any of the occasionally spurious claims made in last night’s State of the Union address - that are being seen as the key drivers here. GBP/USD has given up its hold on the 1.24 handle so we’re starting the month at levels not seen since late January, but with a raft of data due for release from London at 9.30am GMT including UK manufacturing PMI for January – a figure that should be bolstered by the pound’s weakness – anything considered upbeat here could be sufficient to claw back some of these losses.

That talk of higher US interest rates played out as would have been expected with regard to gold, with prices slumping back below $1250/oz again on the back of last night’s call by the Fed. Assuming the theme of certainty over monetary policy can be sustained and we don’t see any abject signs of panic emerging in terms of geopolitical uncertainty then the downward trajectory here may well be relatively easy to maintain, with the healthy profits year to date looking vulnerable.

It was a game of two halves for AUD/USD with that hawkish note from the Fed being countered by the better than expected Chinese PMI readings, with both the official and the Caixin prints impressing. However these numbers from Beijing haven’t had a sustainable impact so far, leaving the pair languishing. The trade balance data from Australia that’s due for release at 12.30am GMT tomorrow could therefore provide some generous support for the Aussie dollar even if it’s broadly in line with expectations.

The Bank of Canada will provide an update on monetary policy later today and although there’s zero expectation of any change in rates, the tone that’s adopted will be worth watching. Rates could well be on hold until 2019 as concern over Trump’s tweaks to cross border trade weigh, but the Canadian economy does appear to be improving as lower oil prices are accounted for. Anything suggests we might not be in for a two year wait for change could be sufficient to help reign in some of the recent gains we’ve seen posted for USD/CAD.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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