USD: Shaking off political risk - AmpGFX

The USD has performed solidly in the face of more intense political uncertainty since the weekend and in last week, it was tending to strengthen despite a poor showing by Republicans in the 18th District Pennsylvania special election and staff turnover at the White House, explains Greg Gibbs, Analyst at Amplifying Global FX Capital.

Key Quotes

“The ongoing noise around the Trump tariffs and worries over a trade war also appeared to have had less negative impact on the USD in the last week, but instead may have dampened the performance of emerging market assets and currencies, and perhaps also weighing on the EUR somewhat.”

“After the McCabe firing over the weekend, comments from the President and his legal team aimed at discrediting the Mueller investigation, and claims of ‘deep state’ conspiracies, we feared a fallout for the USD.  News related the Mueller investigation has appeared to weaken the USD at times over the last year.  However, there has been little negative fallout for the USD so far this week.”

“Perhaps the USD’s strength is coming from the anticipation of the FOMC meeting on Wednesday.  If so, its continued strength into end week may rely on the Fed delivering at least some sign of a lift in the probable path for rates.  However, it does appear that the USD is demonstrating a more solid footing.”

“Nevertheless, it still faces significant political headwinds as the mid-term elections draw nearer and the noise around the Mueller investigation picks-up.”

“Trumps net disapproval rating in a Real Clear Politics index, based on a range of polls, remains significantly net negative, well down over the 15 months of the Trump Presidency.  However, it has improved somewhat since the tax cuts were passed and may have been lifted a bit by the Tariff/trade protectionist rhetoric.”

“This improvement has not been enough to lift the probability that Republicans can retain control of House of Representatives after the November mid-terms.  This has deteriorated in the wake of the P18 election.”

“A House controlled by the Democrats greatly increases the risk that impeachment proceedings are brought against the President if the Mueller investigation finds enough evidence to suggest that Trump obstructed justice or colluded with Russian actors in their efforts to swing the 2016 election in his favour.”

“Trump’s actions suggest he would not take this lying down and would intensify attacks on the Clintons, Obama and their supporters, including claiming bias in key government agencies.  The risk of this all becoming a major distraction for government and public discourse into and after the November mid-terms remains high and still threatened to undermine the USD.”

“Nevertheless, the USD is proving more resilient to the latest spike in political uncertainty, and it might be able to continue to shake-off political risk in the near term.”

“Just ahead of the tariff news on 1 March, the USD was showing signs of breaking higher, reaching its high point since mid-Jan, breaking briefly above a down-trend wedge after making a double-bottom.  Notably, this occurred just after the more hawkish Powell Testimony to Congress.”

“The turmoil that followed the tariff announcement appeared to weaken the USD initially, even though you could have argued it might support the USD particularly against EM currencies and even the EUR.”

“After a choppy period over March-to-date, the USD again appears to be creeping up to test key resistance levels on broad indices.”