The saga concerning Donald Trump’s trade policy continues. These reports in a way cast a shadow over the publication of macroeconomic data, which currently only constitute the backdrop to the main events. Yesterday’s press conference of the new president was quite interesting. He ordered his administration to consider reciprocal tariffs with 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 tariffs for all countries. This policy is being consistently implemented, albeit in a somewhat different form. Now the majority of countries will be subjected to them, but to varying degrees depending on the level of actual or perceived trade inequality. Exemptions were categorically excluded, and it was emphasized that tariffs on car imports could be introduced soon (at higher levels than reciprocal duties). The European Union is particularly targeted.
Despite these comments, the US dollar weakened and the main currency pair reached its local highs yesterday around 1.0470. The US dollar was also not strengthened by Wednesday’s CPI data and Thursday’s PPI data.
The market is currently focusing on the fact that each country will be individually evaluated before imposing tariffs. The lack of an appreciative move may suggest that much of this has already been discounted in USD prices, and further reports are not currently a strengthening factor.
Looking at the speculative net positions reported by the CFTC, investors are extremely positively positioned. The dominance of “long” positions may have reached their peak for the time being, 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 future. There is a risk that some “long” positions will be closed due to profit taking. This is not immediately a trend change. For that, we would need to see an increase in “short” positions, and this process will not be a day-to-day change. This could 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 a trend change on EURUSD. The euro will still be weakened by the prospect of the ECB’s loose monetary policy and will lose out due to possible actions aimed by Trump.
The risk of imposing significant tariffs on imports from the EU is high, and this will imply a depreciation of the common currency. At the same time, it is likely to raise inflation in the US. At the same time, in light of recent comments from the Fed and surprisingly high inflation in the United States at the beginning of the year, further cuts in US interest rates are becoming less and less realistic. In the medium term, the dollar should therefore continue to have an advantage over the euro.
The attitude towards the dollar may only change when the Fed radically changes its approach. Investors will turn away from USD when a 180 degree shift in central bank communication is initiated.
Łukasz Zembik, Oanda TMS Brokers.
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Source: https://ceo.com.pl/ue-na-celowniku-trumpa-kurs-dolara-i-euro-w-cieniu-polityki-handlowej-usa-37365
