Trump on US Currency Intervention

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The issue of potential US currency intervention has taken on greater focus over recent months.

This view has grown steadily, in line with consistent comments made by President Trump regarding both the excessive strength of the US dollar as well as his desire for the Fed to refrain from tightening monetary policy.

However, despite the comments which Trump regularly makes on Twitter and in interviews, the President has yet to intervene in the markets. That being said, recent reports indicate that such a move has been considered.

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White House Adviser Says Currency Intervention Ruled Out

Speaking with CNBC last week, White House adviser Larry Kudlow said:

“Just in the past week, we had a meeting with the president and the economic principles and we had ruled out any currency intervention”.

During the interview, Kudlow explained that officials had discussed all the options open to them in the meeting. This included using the US Treasury’s $94 billion exchange stabilization fund, which they ultimately rejected.

Trump Backpedals

However, Trump confusingly told reporters, only hours after Kudlow’s interview:

“I didn’t say I’m not going to do something”.

The situation is the latest in a series of recent public back-and-forth policy blunders from Trump. And it echoes the ordering of an airstrike on Iran not too long ago.

For the market, it was a telling insight into the administration’s preoccupation with USD strength. Indeed, Kudlow’s comments will likely have added further support for the greenback.

The USD has been rallying strongly ahead of the FOMC this week.

FOMC In Focus

At this point, we can expect the Fed to cut rates by .25% this week. However, USD has been supported by the pullback in market pricing for a larger .50% rate cut which has seen its odds slashed from around 70% to 20% in light of better than expected US data last week, as well as clarification around dovish comments made by Fed’s Williams.

Fed Clarifies Dovish Comments

During a speech at the Central Bank Research Association, Williams said that the Fed “should act quickly” and should not look to keep its powder dry. These comments were taken by the market as a sign that the Fed would likely cut by the larger .50%.

However, the Fed then made the unusual move of clarifying William’s comments. A spokesperson for the Fed said of Williams’ comments:

“This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting,”

The greenback continues higher today as the market now perceives a lower likelihood of the Fed cutting by .50%. In fact, there is a risk now that if the Fed does proceed and cut rates by the expected .25%, that USD will continue to trade higher out of disappointment.

Trade Talks To Resume

Attention this week will also be on US-China trade talks which are set to resume following the breakdown in May. The talks come on the back of the recent meeting between Trump and Chinese premier Xi-Jinping.

The market is hopeful that the two sides will be able to deliver a deal this time around, avoiding further tariffs and the accompanying global uncertainty. The talks will be closely watched by the Fed, given the importance it has placed on risks from the trade war. However, any deal will likely take a long time to come to fruition and talks are likely to be labored once again.

Technical Perspective

usd index

The USD Index continues to rally higher this week as the recovery above the 97.11 level continues. For now, price is trading in the middle of the recent bullish channel nearing the 2019 98.30 highs. Above here, the next level to watch will be the channel top with further structural resistance around 99.24. To the downside, any move lower here will put a focus on a test of the channel low, with structural support coming in also around 95.42.

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