Trump goes after dollar again but EURUSD still shaping up for push lower

The dollar starts Friday on the back foot after Donald Trump broke with tradition (amazingly) and criticised the Fed for raising rates and once again laid into the EU and China about their currency weakness – i.e. dollar strength.

The comments in the interview may well worry Fed watchers and policymakers given the implicit meddling in their affairs. It may be that someone has just explained yield curve inversion and recession risk to him, but really you cannot help feel this is less about criticising the Federal Reserve for monetary policy decisions and more about attempting to cool the dollar’s ascent. In Jay Powell, his pick is in the Fed chair and the pace of tightening has been no quicker than markets have been broadly anticipating this year.

A clear pattern is emerging – Donald Trump wants a weaker dollar. Prior to his inauguration he said the dollar was ‘too strong’. Then earlier this year Treasury secretary Mnuchin echoed those comments when he openly questioned the strong dollar policy. The Mnuchin effect lasted until the middle of April, but since then the dollar has been on the rise again, with the dollar index hitting 95, a level not seen since November last year. When you look at the trade policies he’s pursuing, a weaker dollar makes sense. The only problem is that an all-out trade war, by making dollars scarcer, will force up the greenback against its peers.

Looking at the EURUSD chart, however, the picture remains pretty bearish. We have continued weakness as the pair fails to break to hold the 1.17 handle. Longer term the daily chart is shaping up as a major head and shoulders reversal pattern. A break below the 1.1510 lows and into the 1.14 handle could signal a longer term move lower.

Not much help for sterling from all of this either this week. Weaker-than-expected inflation and a dismal set of retail sales figures have pinned GBPUSD back to the 1.30 level, where it is struggling to hold this morning despite the weakness in USD. Increasing talk of a no-deal Brexit weighs heavily and we await the Bank of England in just under two weeks – whilst a hike seems unwise given the precarious nature of the economy, markets suggest a roughly 50% chance the MPC will go hawkish (down from 80% last week, we must note). It’s a toss of a coin whether GBP rallies from here.

A move back below 1.30 could take cable down to 1.29 and then there’s little support all the way down to 1.25. Nevertheless, bullish divergence on the RSI with a series of higher lows set against the declining price action may suggest a turnaround in fortunes for the pound.