Dollar Weakens Despite Trump’s Aggressive Trade Moves, Euro in trouble

The issue concerning Donald Trump’s trade policy continues. In a way, these pieces of news cast a shadow over the publication of macro data that currently constitute only the backdrop to the main events. Yesterday’s press conference by the new President was quite interesting. He ordered his administration to consider mutual tariffs on a large number of trading partners and to impose duties on each country individually, depending on the losses incurred.

During the election campaign, we heard from Trump about equal duties on all countries. The policy is consistently implemented but in a somewhat different form. Now most countries will be subject to these duties but to varying degrees, depending on the level of actual or perceived trade inequality. Exceptions have been categorically excluded and it was explicitly emphasized that import tariffs on cars could be introduced soon (at higher levels than mutual duties). The European Union is in the crosshairs.

Despite these comments, the US dollar weakened and the main currency pair reached its local highs around 1.0470 yesterday. The dollar was also not strengthened by Wednesday’s CPI data and Thursday’s PPI.

The market is currently focusing on the fact that each country will be individually assessed before imposing tariffs. The absence of an appreciation movement may suggest that much of this has already been discounted in USD prices and further reports do not currently constitute a strengthening factor.

Looking at net speculative positions reported by the CFTC, we see extremely positive positioning of speculative investors. The decided predominance of “long” positions may have reached their maximum for the moment, at least in the short term. It can be seen that the net position is at a similar level as in 2018. This fact may limit USD appreciation in the near term. There is a risk that some “long” positions will be closed due to profit realization. This does not automatically mean a change in trend. To see this, we should see a rise in “short” positions, and this process will not be a day-to-day change. This may therefore imply a slightly larger upward correction on the main currency pair, at least to around 1.06 or 1.07. However, I do not expect trend changes on EURUSD. The euro will continue to be weakened by the prospect of loose ECB monetary policy and, in addition, will lose out due to possible actions initiated by Trump.

The risk of imposing substantial duties on imports from the EU is high and will cause the depreciation of the common currency. At the same time, it is likely to increase inflation in the US. At the same time, in light of recent Fed comments and surprisingly high inflation in the United States at the beginning of the year, further interest rate cuts in the US are becoming increasingly unrealistic. In the medium term, therefore, the dollar should continue to gain strength against the euro.

The attitude towards the dollar might change only when the Fed radically changes its approach. Investors will turn away from USD when a 180 degree shift in the central bank’s communication is initiated.

Łukasz Zembik, Oanda TMS Brokers