US Dollar Rebounds as Market Eyes China-US Trade Talks and Fed's Powell in Jackson Hole

-USD rebounds as China-US talks begin ahead of Jackson Hole.

-Markets are in "risk-off" mode likely till Jackson Hole passes.

-Powell's Jackson Hole address has scope to end USD rally.

© Dmytro Synelnychenko, Adobe Stock

The US Dollar rose into the Thursday session as financial markets shifted into "risk-off" mode ahead of planned talks between White House trade representatives and Chinese officials, which saw both the Pound and Euro fall relative to the greenback, while the Australian Dollar also came under pressure.

US and Chinese officials will meet in Washington Thursday following an invitation from the White House to discuss differences over international trade that have seen the world's two largest economies come to blows in recent months. 

"The President wants to see free, fair, and more reciprocal trade between other countries, particularly with China, and we’re going to continue in those conversations," says Sarah Huckabee Sanders, White House press secretary, in a briefing late on Wednesday.

The White House has announced tariffs on around $250 bn of China's exports to the US, while China has retaliated with its own levies on a smaller amount of US goods, which has prompted fears of an all out "trade war" and helped drive the US Dollar higher ever since April. The Dollar index is now up 3% for 2018 after more than reversing a % first-quarter loss.

"The start of the Chinese/US trade talks has given Asian currencies a risk-off feel overnight and the dollar is recovering from a week's falls," says Kit Juckes, chief currency strategist at Societe Generale. "Objects in mirror are closer than they appear is Omair Sharif's take on the FOMC Minutes, which he thinks show business as usual for now but a growing awareness of longer-term economic risks. Does that set the stage of Jackson Hole? Markets overall seem to be unsure whether the message is hawkish (carry on hiking) or dovish (keep an eye on the weather)." 

Trade talks come hard on the heels of minutes from the latest Federal Open Market Committee (FOMC) meeting and ahead of an eagerly anticipated speech from Federal Reserve chair Jerome Powell at 15:00 London time in Jackson Hole, Wyoming on Friday.

Many expect this will be a pivotal moment for the US Dollar, from which the greenback will either find impetus for continued gains, or be left reeling. 

Wednesday's FOMC minutes suggested the Federal Reserve is on course to raise interest rates in September and December. However, they did little to boost the Dollar given both of these rate hikes are fully priced into the market. 

"The Fed seems convinced of the need to continue on a gradual path to higher rates," says Avery Shenfeld, chief economist at CIBC Capital Markets. "Still, there are reasons to expect a slower pace to Fed hikes in 2019, as the Committee discussed the uncertainty over where the neutral rate lies and the lack of room to provide stimulus should the economy slow too much." 

Powell's speech at the annual symposium of central bankers in Jackson Hole Friday could yield little more than a reiteration of points already contained in the FOMC minutes minutes but, equally, it could also see him address the emerging market rout that got underway following the last Fed meeting at the end of July. 

Those minutes were, after all, taken before the emerging market universe came close to implosion in August. The US Dollar has gained 6% over the South African Rand in the last month and close to 30% over the Turkish Lira.

"Fed chair Powell has shown every sign of wanting to stay the course and continue to tighten US monetary policy, but a chorus of voices is beginning to speculate that the Fed can’t ignore the risks of an EM meltdown. Any hint that his stance is softening (second-guessing the current QT schedule?) could trigger significant volatility in FX, likely providing a massive sentiment boost for global markets and a steep USD sell-off," says John Hardy, chief currency strategist at Saxo Bank.

The Jackson Hole speech will follow closely behind President Trump's criticism of the Fed for its continued tightening of US monetary policy ever since Powell, who was nominated for the role by Trump, took the helm in February.

"President Donald Trump’s recent public criticism of Fed Chair Jerome Powell is a clever attempt to pre-emptively blame the Fed and its interest rate hikes for any future downturn in the US economy. The particular danger for him is that weakness could coincide with the 2020 election campaign, when he would be most vulnerable. We strongly doubt that the Fed will change its policy approach based on his cajoling," says Paul Ashworth, chief US economist at Capital Economics.

Jackson Hole also takes place amid rising uncertainty over the future capacity of the US administration to implement its agenda, and even over President Trump's tenure in the White House, given the looming midterm elections. 

Trump's former campaign manager Paul Manafort was convicted of a series of campaign finance violations while President Trump's former attorney, Michael Cohen, also pleaded guilty to similar charges.

Wednesday's twist comes after a year-long investigation by special prosecutor Robert Mueller, which sought to uncover evidence of alleged-collusion between the Trump presidential campaign and the Russian state.

And with Trump's tax reforms having got the US economy firing on all cylinders earlier this year, and pushed up the Dollar over recent months, the in-court developments could eventually be bad news for the greenback.

The US Dollar index was quoted 0.34% higher at 95.40 during early trading Thursday. The Pound-to-Dollar rate was 0.34% lower at 1.2861 and the Euro-to-Dollar rate was 0.21% lower at 1.1560.

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