President Donald Trump is making the headlines again. This time by criticizing Jerome Powell and complaining about the Federal Reserve’s rate hikes to Republican donors at a Hamptons fundraiser on Friday in a closed meeting. His comments also went public on Monday after he told Reuters that he was not thrilled about the Federal Reserve’s decision this year to raise interest rates. This is not the first time Trump has hit the Federal Reserve, earlier in July he tweeted “The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done.”
As a result, the dollar index fell further from a 13.5 month high to trade below 95.5 for the first time since August 9. Trump’s criticism of the Fed was not the only reason for the dollar’s decline. Treasury yields also fell across the yield curve on Monday with the 10-year yields trading 18 basis points below August highs of 3.01%. Comments from Atlanta Fed President Raphael Bostic that he expects only one more interest rate hike in 2018 also encouraged traders to take some profits on long dollar positions.
Given that there are no tier-one economic data on the calendar on Tuesday and Wednesday, sentiment will continue to be driven by politics. China-U.S. trade talks will kick off tomorrow, but Trump is also not showing much enthusiasm and said he did not anticipate much from the talks. However, any small signs of progress may still provide equities a boost. Investors want to know whether these lower level meetings will lead to higher level negotiations in the coming months. If that’s the case, expect the dollar to fall against the Yuan and other emerging market currencies. The dollar may also fall further against the Euro and its major peers because after all, the greenback became investors’ first choice in this trade battle.
Gold prices also shot higher on Tuesday recovering almost $35 from the lows tested on Thursday. The recovery began after the latest Commitment of Traders report showed that gold speculative short positions reached a record high last week. Gold backed ETFs also dropped heavily over the past three months with investors continuing to pull out. Whether the recovery will continue or not depends on how the situation between the U.S. and China evolves. I expect the recent high correlation between Gold prices and the Yuan to remain in play. On a technical level, price should move above $1,205 to indicate a change in trend.
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