Dollar Rises on Inflation and Trade Optimism

The US dollar is higher against most major pairs on Wednesday. The New Zealand dollar is the outlier as it appreciated 0.91 percent after the Reserve Bank of New Zealand (RBNZ) kept rates unchanged as expected at 1.75 percent on Tuesday but was not as dovish adopting a neutral stance.

US inflation data came in close to forecast. The Fed has put the brakes on its tightening of monetary policy but after strong employment data and solid inflation indicators the market could start pricing in a rate hike in the summer. Fed members have kept their comments neutral but as more evidence of strong growth, the central bank could change its tune.

Signs of an economic slowdown in Europe and China are showing that the US economy remains the engine of global growth. Political uncertainty has limited the rise of the US dollar, but this week could be a breakthrough as trade talks with China and an agreement to avoid a government shutdown are on the table.

Oil prices rose despite a higher than expected buildup of US crude stocks on Wednesday. Oil inventories jumped 3.6 million barrels versus he forecasted 2 million. It is no secret that US production is ramping up, but external factors kept crude from falling. OPEC production cut compliance and positive comments on US-China trade with a deal on the table to avoid a government shutdown in Washington.

Although current trade talks might not end in a major breakthrough it has brought the two largest economies closer to a deal. US President Trump is now expected to meet with President Xi in mid-March. The 90-day truce agreed in December will run out on March 1 but given the progress of the talks there could be an extension, which is why there are rising optimism that the two leaders will meet later that month.

West Texas Intermediate graph

An extension on the trade cease fire with the possibility of an upcoming agreement could put global growth back on track after several agencies downgraded their forecasts impacting energy demand.

Gold fell 0.37 percent on Wednesday. US inflation remains steady keeping the Fed rate hikes on pause, but positive developments in geopolitics favoured the US dollar over the yellow metal. As the deadline on the US-China approaches an extension might be in the works as US Secretary Mnuchin and Trade Representative Lighthizer are in Beijing for next level trade talks. The timeline could be stretched if progress is made so that Presidents Xi and Trump could meet if there is a major announcement to be made.

Gold remains above $1,300 but as the government shutdown and US-China trade talks appear headed to bear fruit this week it could push the metal below that price level. Risk events remain on the table in the short term which could limit the fall in gold prices as President Trump has not signed the Border bill, and there are few details on what to expect from the US-China trade meeting.

Trade talk optimism boosted global exchanges on Wednesday. An extension to the March 1 deadline appears to be in the works although there have been little in the way of details if any progress has been made during the talks. A meeting between the Presidents of China and the US could happen in mid-March.

An agreement by Democrats and Republicans is being reviewed by President Trump, that if signed would avoid another government shutdown. The decline in risk sentiment has been a positive for global markets. There are still issues to sort out and Trump is said to be reviewing it, and while not completely happy with the border wall funding, he might sign it to avoid a shutdown.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza