U.S Dollar Looks to the Fed and Major Tariff Decision for Support

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- USD softened at start of week.

- But Fed rate decision and China uncertainty offer support mid-week.

- Scope for profit-taking in GBP to aid USD on Wednesday.

- Market waits with bated breath for Trump’s tariff decision.

- Pre-election profit-taking in GBP could also aid USD ahead.

The Dollar could draw support on Wednesday from the looming Federal Reserve interest rate decision, while ongoing uncertainty over whether or not the U.S. will proceed and implement a raft of tariffs on China on Sunday should provide some downside protection for the Greenback.

“The U.S. Dollar failed to completely break down recently despite a push lower versus stronger currencies like the kiwi and especially Sterling, and has thus largely failed to generate momentum,” says John Hardy, chief FX strategist at Saxo Bank. "Few currencies are on the move, with the most notable of these over the last two weeks sterling and kiwi, both of which have rallied strongly. Sterling faces a key test late Thursday as the results of the UK election roll in."

Foreign exchange markets will over the mid-week session turn their attention to the final 2019 interest rate decision of the Federal Reserve (Fed), which is widely expected to leave the Fed Funds rate unchanged at 1.75% into the New Year. This will leave markets looking to the accompanying statement, forecasts, and press conference, where they’ll likely scrutinise the tone and remarks of Chairman Jerome Powell and other policymakers for clues about the outlook. 

Powell and other policymakers have said several times in recent weeks that the U.S. economy and interest rates are in a “good place” and that it would take a “material reassessment” of the outlook to change that view. U.S. economic data has been mixed since those comments were made, which seems to many analysts unlikely to be cause for any reassessment of current policy settings. 

“It will truly be another “sigh of relief” meeting for the FOMC in our opinion because recession fears have miraculously subsided and the money markets are not forcing the Fed to do anything at this point. We’ll get a look at US November CPI before the meeting at 8:30am ET tomorrow,” says Eric Bregar, head of FX strategy at Exchange Bank of Canada. “GBPUSD is now testing weekly chart resistance in the 1.3180s.” 

Above: Pound-to-Dollar rate shown at hourly intervals. 

Institute for Supply Management (ISM) PMI surveys pointed to ongoing weakness in the services and manufacturing sectors in November but the Bureau of Labor Statistics nonfarm payrolls report released on Friday was a blowout, with 266k new jobs believed to have been created last month - the highest number since December 2018. Meanwhile, inflation rose from 1.7% to 1.8% in October and markets are looking for Wednesday’s November numbers, due out at  13:30, to take the consumer price index up to the Fed target of 2%. 

Such gains in prices and jobs are hardly a recipe for panic at the Fed, which has cut rates three times this year in the hope of protecting the U.S. economy from an ongoing global slowdown that’s already bitten the American manufacturing sector and is increasingly asserting itself on other parts of the economy.

In other words, the Fed has got little if-any reason for ‘dovishness’ on Wednesday, which could mean that Powell’s comments and the bank’s policy statements may ultimately end up providing the Dollar with support.

“Apart from the central bank decisions the market is likely to be waiting intently for news about the US-Chinese trade war, as a statement from Washington on the introduction of further US tariffs on Chinese imports is still outstanding,” says Thu Lan Nguyen, an analyst at Commerzbank. “The relatively small exchange rate fluctuations over the past days (apart from strong intraday moves) suggest that the majority of market participants expect the tariffs to be postponed.”

Above: Dollar Index shown at daily intervals. 

If the Fed decision fails to revive the Dollar on Wednesday, then the latter part of the week may offer an opportunity for the U.S. currency to find support in a familiar haunt; the embrace of safe-haven-seeking flows driven out of riskier assets by a fresh bout of U.S-China tensions. 

The Fed decision will hit the wires as markets wait to hear if President Donald Trump will go ahead with already-scheduled tariffs on all of China’s remaining annual exports to the U.S., with the latter due before Sunday. 

Trump and Commerce Secretary Wilbur Ross have both said recently that without the much-vaunted ‘phase one deal’ to end the trade war, those tariffs will go ahead. And on Tuesday that deal was still elusive with no word from the White House of a delay to implementation. Going ahead with the tariffs would deliver another blow to an already-troubled global economy. 

“Sterling looks set for yet another night of politically driven volatility as the UK essentially chooses between a massive Tory led fiscal expansion, and an even more massive Labour led fiscal expansion. Although government spending will be strongly accommodative in any of the plausible configurations for the next government, the similarities between Labour and the Conservatives end there,” says Ranko Berich, head of market analysis at Monex Europe. 

Above: Pound-to-Dollar rate shown at weekly intervals. 

Weakness in Pound Sterling and the highly-correlated Euro could also be a source of support to the Dollar on Wednesday and Thursday if market confidence in the opinion pollsters falters before the outcome of the UK’s election becomes known. 

The third in five years that vote is billed by pollsters as a two horse race between the governing Conservative Party, which is attempting to cast itself as a different party to the one that presided with former PM Theresa May over three disastrous Westminster years, and the increasingly radical or ‘far-left’ opposition Labour Party led by Jeremy Corbyn. 

Thursday’s outcome, which will be known in the early hours Friday, could be the difference between the Pound finishing the year at 1.20 and at 1.35. In other words, Sterling’s fortune will be made or lost by voters this week.

“With just two days left until the UK’s general election, and the Conservatives holding a roughly ten-point lead in the polls, the probability implied in betting markets of a Conservative majority has risen a little further in recent days,” says Oliver Allen at Capital Economics. “This adds to the evidence that investors in sterling are positioned as if a Conservative win is essentially a foregone conclusion. Accordingly, if this came to pass, we think that any rise in pound would be muted. On the other hand, the Conservatives failing to win a majority would come as a shock, and could result in a significant drop in the pound. We suspect that it could fall as low as $1.20/£.”

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