Fed Expected to Hold as Trump Comments Sink Dollar

American Trade Adviser Calls Germany a Currency Manipulator

The Trump administration took a strong stance against currency manipulators on Tuesday. President Trump once again made comments against Japan and China and with National Trade Council Head Peter Navarro focusing on the benefits to Germany of a weak euro. The dollar depreciated against all majors with the JPY higher by 2 percent after the Bank of Japan (BOJ) had upgraded its forecasts and Trump’s comments.

There will be a bundle of U.S. data on Wednesday, February 1. The ADP private payroll change will be published at 8:15 am EST. The forecast calls for 165,000 jobs to be added and the final figure will set the expectation for the U.S. non farm payrolls (NFP) report at the end of the week. The ISM Manufacturing PMI will be announced at 10:00 am EST and the crude oil inventories data will be available at 10:30 am EST.

The U.S. Federal Reserve will host the second day of its Federal Open Market Committee (FOMC) meeting in Washington. It will end with the release of the FOMC statement on February 1, at 2:00 pm EST (7:00 pm GMT). There are no changes to the benchmark Fed funds rate expected. The market is pricing around 3 or more rate hikes starting after the first quarter of the year. There is no press conference following the release of the statement so the only insights will be the ones put forward in the document itself and the release of the minutes in two weeks.

The EUR/USD gained 0.825 percent in the last 24 hours. The single currency is trading at 1.0783 after the disappointment with President Trump’s policies have hurt the dollar. The pair quickly went through the 1.07 level and managed to trade above 1.08 before giving up some gains as profit taking took course.

The fiscal stimulus and infrastructure spending policies that helped the USD finish 2016 on a strong note are missing in action, replaced by strong anti-trade and immigration orders that most observers thought would be secondary to pro-growth policies. The first 100 days of the Trump administration have brought so far the worst start for the dollar since the economic crisis. The fundamentals have supported the dollar, but not against the comments from the President in a clear signalling mechanism that he expects the currency to be lower compared to that of America’s trade partners.

Currency speculators have created short positions on the USD as its clear President Trump intends to further drive the greenback down via verbal intervention. If there are signs of higher inflation stoked by government spending the U.S. Federal Reserve will once again have no need to hike rates in 2017, keeping rates at current levels.

The price of gold has risen 1.53 percent today. The metal is trading at $1,212 due to safe haven flows as political uncertainty in the United States has risen following the reaction to Trump’s policies in his first days as the head of country. Dollar weakness is the most important factor in the rise of gold. Without a clear pro-growth strategy from the White House the Fed will not raise rates as inflation will be a non-issue with market uncertainty rising on the combative start to the Trump presidency.

Market events to watch this week:

Wednesday, February 1
4:30am GBP Manufacturing PMI
8:15am USD ADP Non-Farm Employment Change
10:00am USD ISM Manufacturing PMI
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
Thursday, February 2
4:30am GBP Construction PMI
7:00am GBP BOE Inflation Report
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate
7:30am GBP BOE Gov Carney Speaks
8:30am USD Unemployment Claims
7:30pm AUD RBA Monetary Policy Statement
8:45pm CNY Caixin Manufacturing PMI
Friday, February 3
4:30am GBP Services PMI
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate
10:00am USD ISM Non-Manufacturing PMI

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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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