Dollar is waiting for what Powell says

24 August, 2018

The U.S. dollar has returned to growth on the comments from the Fed officials about the need of further rates increases this year and next one. At the end of the day, the dollar index added 0.5% to 95.50. Robert Kaplan and Easter George, the heads of the Fed’s regional Reserve Banks, said on Thursday that Trump’s comments would not affect the central bank’s policy. Those statements made by the Fed representatives strengthened the confidence of the markets in the September hike. The markets also expect a similar rhetoric from today’s Jerome Powell’s speech at the Jackson Hole symposium.

The two ways for FOMC

Market participants will try to assess how much the Fed’s head is concerned about the state of international markets. The consequences of trade conflicts can be assessed from different perspectives.

The new tariffs increase inflationary pressure that will require from the Fed to intensify its rate hikes. In this case, the U.S. currency can return to active growth.

On the other hand, in previous years, the American central bank had corrected its plans considering the state of the world markets. The turbulence of China’s markets in 2015 forced to postpone the tightening of the policy. Such caution is favourable for the stock markets and the demand for risks but it can cause a weakening of the dollar. The tactics of monetary policy and the nearest prospects of the dollar depend on the long-term Fed head’s perspective.

The U.S. Dollar continues its growth

The meeting on trade talks between the U.S. and China did not bring breakthroughs, which also puts pressure on Asian stock markets on Friday morning, as MSCI loses 0.6%, and Hong Kong’s largest companies lose 0.8%. The decline in stocks hampers the demand for the emerging market currencies and supports the dollar.

The strong level of support, which the dollar index approached in the first half of the week, can also explain the reversal to growth. The American currency had experienced an increased demand on falls to the former upper bound of the trading range for the previous three months. The increase above 95.0 level by DXY earlier in August marked the probable beginning of a new American currency rally, which was stopped by Donald Trump’s comments at the beginning of the week.

The dollar purchases on its fall confirm the hypothesis that the former strong resistance is now becoming a significant support level. The EURUSD pair again backs down, unable to catch the levels above 1.1600, and starts Friday with the marks near 1.1530.

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