Dollar Reverses Some of Yesterday’s Gains; Geopolitics Dictate Price Movements

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Dollar Reverses Some of Yesterday’s Gains; Geopolitics Dictate Price Movements

The seesaw ride in global markets looks to continue today.

Overview

After being under pressure to start the week, the U.S. dollar experienced a sharp rally yesterday afternoon as stocks dumped after the President tweeted that he was unilaterally ending stimulus negotiations until after the election. Equity markets fell over a percent within minutes, and investors rushed to the safety of the U.S. dollar and Japanese yen.

The President spent much of the evening on social media, partially walking back his previous stimulus tweet. Trump indicated that he would back a limited virus package for airlines and small businesses. The 160$ billion small package the President was referring too is a far cry from the 1.6 trillion dollar package proposed by Republicans and the 2.2 trillion Democratic proposal. Nevertheless, risk looks to rebound today, and the dollar has moderated its gains from yesterday afternoon.

Ending the negotiations came only hours after Federal Reserve chief Jerome Powell implored Washington to enact a fiscal stimulus. In the aftermath, analysts have begun to question whether we may see more monetary stimulus from the central bank. Such actions would be seen as dollar negative.

The minutes from the last FOMC meeting will be released this afternoon but might be considered stale in light of yesterday’s developments.

What to Watch Today…

  • FOMC minutes at 2 p.m.

View this month’s Economic Calendar

Catch this month’s FX outlook from our Bloomberg-ranked currency traders…

October Monthly Outlook

EUR  

The Euro was at the mercy of U.S. politics yesterday, falling sharply after President Trump cut off stimulus talks. EUR/USD was previously sitting close to the highs of recent ranges and is recovering in early trading. The move higher in the Euro is likely a function of rising risk sentiment, as European data continues to underperform. German industrial production fell by 0.2% in August, failing to meet an expectation of 1.5% growth.

European Central Bank President Christine Lagarde is holding a live interview with the Harvard International Review at the time of writing. While she has maintained a dovish view that the bank “should guard against premature withdrawal of stimulus,” she has not changed market sentiment thus far.

GBP  

Sterling is another currency that is taking its cues mostly from geopolitics instead of fundamental data as of late.  GBP/USD has traded mostly on Brexit headlines and we can expect much of the same the rest of the week.

Talks between the E.U. and the U.K. will likely come down to the wire, which we expect to be October 15th.  However, the EU has indicated it would allow talks to drag on.  French President Emmanuel Macron is standing firm on his demand to keep the same access to British waters to protect the French fishing industry which is a major point of contention.

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