US Dollar Strengthens Against Pound and Euro on Comey Testimony

The second major event for the foreign exchange markets of Thursday, June 8 is underway - the appearance of James Comey before US lawmakers.

Ex-FBI Director Comey is testifying about his interactions with President Trump with regards to investigations into Russian intereference in the US election.

We have seen the US Dollar strengthen during the testimony with the EUR/USD down 60 pips, the GBP/USD down 50 pips.

This would suggest that no seriously damage has been done to Trump's administration.

Comey was abruptly fired by US President Donald Trump in May and the testimony is expected to discuss interactions between the two men concerning the FBI’s investigation into possible links between Trump’s associates and the Russian effort to tamper in last year’s presidential election.

Trump cited Comey’s handling of the Clinton investigation as the reason for his firing and law-makers will be interesting to find out whether this was in fact the case.

The conduct of the President through the process will also be of interest and markets will be looking for signs that Trump has done anything that might warrant his departure from office.

"The release of Comey’s initial statement has removed some of the uncertainty and risks from today’s testimony. However, the question and answer session may still reveal some surprises regarding his relationship with the White House," says Robin Wilkin, an analyst with Lloyds Bank.

Prepared testimony by Comey reveals Trump put pressure on him to drop enquiries related to an ongoing investingation into Russia's meddling in the 2016 election.

Currency Implications

“It would appear that foreign exchange markets have approached the testimony by buying relative safe havens such as US Treasuries, gold and JPY,” says Shahab Jalinoos, a research analyst with Credit Suisse. “In addition, the market is showing signs of looking for protection in the options space against even more adverse outcomes.”

There is therefore discernible market nerves concerning the event.

It is no wonder traders are calling June 8 a ‘super-Thursday’ event with Comey’s testimony combining with the UK elections and the European Central Bank’s June policy meeting.

But why does Comey matter?

“The market’s main tail-risk concern appears to be that Comey’s testimony incites enough controversy to further entangle the White House in political mire and make progress towards meaningful positive fiscal and regulatory steps even slower than it has been until now,” says Jalinoos.

The analysts says the worst-case possible outcome would be that the testimony elicits calls for Trump’s impeachment.

“This presents a tail risk that the political process stalls or takes a dramatic turn
towards negative outcomes, with difficult implications for still-frothy risky-asset markets,” says Jalinoos.

There could be a positive in that Vice-President Pence takes over as President - something both the Conservatives and Republican establishment would likely welcome.

But, the path to that point would be mired in uncertainty - and markets hate uncertainty.

Keep Betting Against the Dollar

There is the chance the Dollar could rally in relief on the back of the hearing should it not result in any overtly negative outcome for the Administration.

However, Credit Suisse argue that any strength is likely to prove transitory as they believe Trump simply won’t be able to deliver the tax and spend promises he made during his election campaign.

Recall that Dollar rallied strongly in anticipation of Trump delivering deep tax cuts and generous increases in spending.

Credit Suisse are therefore targeting USDJPY at 107 and EUR/USD at 1.15 in three months.

GBP/USD is forecast at 1.3070.

“We would look at any short covering in USD that materialises from a benign outcome as an opportunity to re-enter USD shorts from better levels as opposed to a reason to chase the greenback higher,” says Jalinoos.