Dollar Gains ahead of Washington Impeachment Bid but Other Factors Matter More to Outlook

Image © White House

- USD builds gains ahead of House vote on impeachment of Trump. 

- Wednesday vote to impeach far from assured following investigation.

- Trump's conviction and removal from office remain a long way off.

- Leaves U.S.-China, Fed policy and global factors in driving seat.

The Dollar built on earlier gains Wednesday ahead of an eagerly-awaited House of Representatives vote on whether to impeach President Donald Trump, although European currencies, the trade war with China and outlook for Federal Reserve (Fed) policy all matter more to greenback's trajectory up ahead.

Democratic Party lawmakers have been leading an investigation into allegations of improper behaviour by President Donald Trump during his time in office and with the findings now in, the House of Representaives is set to vote Monday evening on whether to impeach the president. 

A 'House' vote alone would not be enough to 'convict' President Trump of anything and certainly wouldn't remove him from office, which could mean the risk to the White House from Wednesday's events is limited at best or worst. The Democrat-controlled House can impeach a president through a simple majority vote but conviction requires something like a qualified majority in the Republican controlled Senate. 67 out of 100 Senate votes are required in order to convict. 

"We're not sure exactly what to think of the impeachment debacle in the US at this moment in time. We know that impeachment in the House and no conviction in the Senate is basically "what is in the price". It should be the case that if the vote today unexpectedly fails to open the door to a trial in the Senate that the USD appreciates - but tentative signs of a global rebound in some economic data have also been restraining USD appreciation, and this sentiment appears unlikely to dissipate fully for now," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. 

Above: Dollar Index shown at daily intervals. 

The high hurdle in the Republican Senate could mean a conviction is unlikely anyway although polls frequently cited by Trump have suggested that only a very low share of the American popular vote sees merit in the Democratic Party's allegations and investigation. That might matter to some lawmakers given the next presidential election is less than a year away. 

With an election year just around the corner, there is uncertainty over whether the Democrat controlled House will even be willing to vote for impeachment. The House vote will, after all, come on the same day that one of America's most secretive courts publicly rebuked the Federal Bureau of Investigation (FBI) for improper conduct in its handling of evidence purporting to indicate a connection between Trump's 2016 presidential campaign and Russia, as well as a lack of candour in its dealings with the court.

Trump has described the Russia probe as a "hoax" and "scam," among other things, and the impeachment proceedings at least appear to be little more than the next evolution of a Democratic Party rearguard action against Trump and the Republican Party for having won the 2016 election. The Russia probe produced a series of indictments but they were all unrelated to its original purpose.

The Foreign Intelligence Surveillance Court rebuke is available here while The Wall Street Journal has more on the story. 

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

"If Trump is only impeached and not convicted, it does not change our base case that Trump will win the 2020 election. Trump is still popular among the Republications and will likely attribute the impeachment case as a “witch-hunt”. This is also why the White House seemingly wants the trial to be prolonged and fully public," says Morten Lund, an economist at Nordea Markets. 

The greenback rose against all of the Dollar Index constituents other than a resilient Canadian Dollar Wednesday, although it ceded ground to riskier rivals outside of the index like the Australian and New Zealand Dollars. Gains came alongside indications of a healthy risk appetite in markets and were aided by a continued retreat of European currencies, with the biggest moves again being seen in the Pound-Dollar and Euro-Dollar rates during the morning session. 

Pound Sterling has an 11.9% weighting in the Dollar index and when combined with the Euro that has a 57.6% share of the basket, the two currencies account for more than two thirds of flows captured by the benchmark so can have a meaningful impact on its trajectory. The British currency is in the process of finding support on the charts after punishing losses on Tuesday, while the Euro-Dollar rate is retreating back to the middle of a multi-month range after being lifted by a sharp adjustment lower in the Pound-Euro rate. 

"Encouragingly, Germany’s IFO business expectations index improved to a seven‑month high in December indicative of a brighter Eurozone growth outlook. We are sticking to our view the ECB will keep policy interest rates on hold over the forecast horizon. This is EUR supportive," says Elias Haddad, a New York based strategist at Commonwealth Bank of Australia. "In our view, GBP/USD will remain supported between 1.3000‑1.3100 because the UK is on the way towards an orderly Brexit."

Above: Euro-to-Dollar rate shown at daily intervals. 

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