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Dollar trades sideways amid positive US-China trade talks and Federal Reserve Remarks

By OFX

The US dollar index increased 0.42 percent during yesterday’s session due to the lack of clarity when Federal Reserve Chairman Jerome Powell said that the central bank would continue to unwind its balance sheet. While Powell reiterated the views of other policymakers that the Fed would be patient about interest rate hikes, he said the bank's balance sheet would be "substantially smaller" and raised concerns about the size of U.S. debt.

In overnight trading, it was a different story; the US-China trade talks appear to be heading towards a constructive, risk-positive result. For instance, the USD/CNH (US dollar – Chinese Yuan) is at its lowest level (strong Yuan) since August as China has pursued additional monetary and fiscal stimulus. China proxy trades (like EUR/USD) continue going higher (strong Euro), and this is also negatively affecting the US dollar. This morning, the US dollar index is falling 0.24 percent.

On the release front, the consumer price index for all urban consumers in the US declined 0.1 percent in December on a seasonally adjusted basis after being unchanged in November. Over the last 12 months, the all items index increased 1.9 percent before seasonal adjustment. Additionally, the index for all items less food and energy rose 0.2 percent in December, the same increase as in October and November.

The USD/CAD pair increased 0.21 percent in yesterday’s trading session after a strong rally of more than 400 pips over the last 10 days. The price consolidation of the Loonie was influenced by a bounce of the US dollar index, a basket of some major currencies such as the Euro, British Pound, Canadian Dollar, and Aussie dollar.

On the release side, the building permits month to month for November came in at 2.6 percent versus -0.5 percent; however, this positive news about the Canadian economy was not sufficient to prevent the USD/CAD from rising (weaker Loonie).

The USD/CAD touched an intraday high of 1.3259 during yesterday’s trading session. However, it was the price of the Crude Oil WTI that came to the rescue when it hit an intraday high of 52.69 per barrel, notching its longest winning streak in nine years as fears of oversupply amid weaker demand have abated.

The European Central Bank stated that risks for the Eurozone are tilted to the downside in Thursday’s publication of the minutes of its latest policy meeting with concerns growing over the state of the global economy. German and French data of late has missed a target with the EZ’s largest economy; Germany looks like it could slip into recession when fourth-quarter data is released early next month. Additionally, there is a deteriorating outlook on money markets due to pushed back estimates of when the ECB will hike rates to 2020 from late 2019. If this is the case, we will have a new ECB chief at the helm when they do move as the current boss, Mario Draghi’s term as Governor comes to an end in November. The EUR/USD pair moved to an intraday high of 1.1540 given the US dollar weakness; it is trading at 1.1528 at the time of this writing.



The Brexit debate is set to continue in the House of Commons later today as we approach next Tuesday’s critical vote on Prime Minister Theresa May’s proposed withdrawal agreement. Yesterday the May hosted Japanese Prime Minister Shinzo Abe at Downing Street and the two discussed a post-Brexit relationship between the two countries. Abe was the latest high-profile name to warn against the UK leaving the EU without an agreement. He said that the “whole world” wanted the UK to avoid a no deal scenario. Political commentators expect May’s plan to get voted down by a massive margin on Tuesday; however, it is what happens after that which will be of concern to fx traders. Many expect Labour leader Jeremy Corbyn to try and initiate a general election, which would likely delay the UK leaving the EU. This would cause uncertainty which fx markets hate, but it would raise the prospect of a softer Brexit, which could support the pound.

GBP/USD surges to an intraday high of 1.2850 due to the news that Brexit could be delayed beyond March 29. The cable is trading at 1.2817 at this moment.

With equity markets relatively calm and progress (of sorts) seemingly being made with US/China talks, the commodity currencies have risen over the past 24 hours. The AUD/USD has pushed up through the 0.7200 handle overnight to sit at 0.7215 currently. Extra upward impetus has been provided by a better than expected retail sales print from down under. Data for November showed a 0.4 percent monthly uptick in spending, which is slightly better than the 0.3 percent forecast. The AUD/USD trades at 0.7217 at the time of this writing.



The NZD/USD pair is back above the 0.6800 handle as the Kiwi ends the week on the up. The next data of note from New Zealand is Monday night’s NZER Business Confidence Survey with holders of the Kiwi hoping for an improvement in last month’s -30, which was its worst reading in nearly ten years. The NZD/USD trades at 0.6829 at this moment.