USD: Politics Overshadow Hawkish Fed Minutes


By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

Wednesday’s sell-off in U.S. equities prevented the from rallying on the back of hawkish . This wasn’t a big surprise because politics is the main focus and President Trump has his eye on Russia and Syria. Earlier this week he canceled his trip to Latin America to prepare a response to the chemical attack in Syria and today he went on twitter to warn Russia that, “missiles are coming” to Syria. Although Trump created more confusion by saying Russia “needs us to help with their economy….and we need all nations to work together,” the Pentagon added that it is ready to provide the president with military options if he thinks it is appropriate. Russia’s UN envoy responded by urging the U.S. to “refrain from the plans,” adding it will “bear responsibility” for any “illegal military adventure.” While it’s not clear how far President Trump will go – we’ve seen him walk back from economic or military threats often – investors are nervous and selling U.S. dollars as a result.

U.S. House Speaker Paul Ryan also announced that he would not be seeking re-election in November.
His decision reflects a lack of confidence in the current administration and the party’s ability to secure a majority at this year’s elections. Representative Dennis Ross of Florida announced his resignation an hour later and more could follow. Ryan is the most prominent member of the party to resign and his exit poses a serious risk to the Republican party’s ability to maintain control of Congress. For better or for worse (we’ll let you decide), if the Democrats win in November, it will make it very difficult for President Trump to get anything done in the second part of his term. These political developments overshadowed , which fell -0.1% in March. Investors and economists had hoped for an increase after yesterday’s report but the underlying trend is still positive with rising 0.2% and the accelerating. also increased. The tone of the was hawkish with the Fed seeing “significant fiscal policy growth boost over the next few years.” As a result, “almost all Fed officials saw gradual as appropriate” with “a number of Fed officials” seeing the need for a “steeper rate path.”

extended its gains, trading higher for the fourth day in a row on the back of positive comments from the ECB and the weaker .
According to European Central Bank President , who spoke Wednesday morning, he is confident that inflation and wages will rise as the economy improves. He doesn’t feel that there will be a big impact from U.S.-Chinese trade tensions but the effect on confidence could be important. Unfortunately the rally stopped a few pips short of 1.2400 and unless we see an additional leg lower in the dollar, euro may struggle to break that level in a meaningful way over the next 24 hours. That’s because Eurozone area scheduled for release on Thursday and the risk is to downside after the sharp decline in .

also ended the day higher against the greenback, shrugging off weaker industrial production data.
IP rose only as fell -0.2%. Although the narrowed, the decline in exports and imports reflects weakness rather than strength. The National Institute of Economic & Social Research also sees , which is less than anticipated. GBP/USD has significant resistance near 1.42 and its ability to extend beyond that level hinges on the market’s appetite for and Thursday’s speeches from the Bank of England’s and .

While all 3 of the commodity currencies held onto their gains versus the greenback, the was the only one to extend its rally. USD/CAD broke below 1.26 to trade at its strongest level in 7 weeks.
There was no Canadian data but the sell-off was supported by the price of , which hit its highest level since December 2014. Canadian are also up sharply and with the prospect of a NAFTA deal, USD/CAD should extend down to 1.25. Meanwhile, weaker Australian and softer in China prevented the from extending its gains.

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