The US dollar fell from the heavens (highs not seen since mid-2017) yesterday evening after Donald Trump announced an additional 10% tariffs on the remaining $300bn worth of non-tariffed Chinese imports. Trump got what he was looking for all along, a softer dollar, as the announcement wiped out any positive sentiment left from Wednesday’s Fed meeting and prompted the DXY index to fall a quarter of a percentage point. This negative momentum carried over into today’s session. Arguably, Governor Powell’s pivot to promote growth in a low inflation environment allowed Trump to add a fresh layer of tariffs on Chinese imports, with one growth positive event outweighed by a growth negative one shortly after. One thing is for sure, however, both monetary and trade policy announcements are inflationary for the US economy and Powell may soon see his 2% target reached. In the past, rising protectionist measures have been a source of dollar strength, but yesterday’s move suggests this is no longer the case as Fed policy becomes a function of US trade policy. If we go by the current market pricing, a rise in trade tariffs has increased the likelihood of a second cut in September’s meeting from 60% to 95%. The dollar sell-off didn’t occur just because of Trump’s tweet though. Yesterday’s release of the ISM manufacturing index highlighted a further slowdown in growth in the sector, with prices paid also offering negative growth. The fun doesn’t stop for the dollar, with July’s Nonfarm Payroll data released this afternoon at 13:30 BST. The Fed has pointed to a tight labour market as a source of strength in the US economy, but many analysts have long called for the US labour market to unwind. Regardless, given the latest dollar volatility, this release is likely to be another market-moving event this week.


Sterling traded flat against USD and EUR yesterday as the Bank of England kept rates unchanged and warned about no-deal risk while declining to include it in any of their central forecasts for policy or the economy. Bank of England Governor Mark Carney and the Inflation Report focussed on the BoE’s base case, which assumed a “smooth” transition to future trading arrangements with the EU – and therefore made for a much sunnier outlook for growth and inflation than current market pricing would seem to suggest. In fact, over a two and three-year horizon growth and inflation forecasts were upgraded substantially, and the MPC even reiterated that based on current projections and market pricing rates would need to rise over the forecast horizon. Carney did warn of a likely fall in growth in the event of no-deal but declined to say which way rates would go. Elsewhere, the Brecon and Radnorshire byelection was won by the Liberal Democrat Jane Dodds, cutting the Government’s majority in the House of Commons to just one seat, highlighting the finely balanced electoral calculus of the United Kingdom at present. Today’s sole data release of note will be the Construction Purchasing Managers’ Index at 09:30 BST.


The most frequently traded currency cross in the world, EURUSD, fell to fresh 24-month lows in the wake of the hawkish rate cut by the Federal Open Market Committee on Wednesday evening. Still, on the day the single currency found itself in the top half of the G10 currency board, together with other funding currencies like SEK, CHF and JPY. These currencies are used in carry trades in which funds are borrowed in low yielding currencies and lend out in high yielding currencies. As hawkish FOMC policies worsen global liquidity conditions, these kinds of trades become riskier and thus less attractive. This is why many carry trades unwounded yesterday, which propped up the euro somewhat. Meanwhile, from a manufacturing perspective, the third quarter is already off to a gloomy start as Final July Purchasing Manager Indices indicate the sector has contracted for the sixth straight month with a score of 46.5. As trade uncertainty was an often quoted reason by survey respondents when asked what caused the deterioration in their business conditions, yesterday’s re-escalation by US President Donald Trump implies manufacturing will be stuck in a rut for longer. Hence, it is no surprise that such uncertainties, together with speculation that the European Central Bank will restart its Asset Purchasing Program, that German 10-year bond yields dropped to the lowest point ever. This eventful week is not over yet as it will be closed off by the Producer Price Index and Retail Sales at 10:00 BST.


Bruised and battered, the loonie continues to swing with the US dollar as oil markets tank following Trump’s tweet. As other currencies take a chunk out of the greenback following the heightened US-Sino tensions, the threat to global growth and thus oil demand sent WTI to shed nearly 4 cents in a rapid fashion. A minor clawback in oil prices hasn’t been a source of strength for the loonie this morning either, as the US dollar flexes its muscles to stand resilient in the face of changing tides. With little in the data calendar today for the loonie, data released in the US will likely run the rocky horror show.

FX elsewhere

An Asia special is warranted as the Japanese yen reaches the highest point in two years on a trade-weighted basis, while the Chinese yuan has seen a rapid deterioration to reach the weakest level against USD since December 2018. JPY profited earlier this year from a broader trend into safe-haven currencies. It also strengthened due to dovish shifts in the policies of other major banks like the Federal Reserve and the European Central Bank. As the Bank of Japan is currently already exercising an ultra-loose monetary policy, it borders the impossible for the BoJ to follow suit in this dovish play. In a development that can only be called ironic, the BoJ’s policies, therefore, become more hawkish in comparison, of which the yen benefits. USDCNY meanwhile swiftly approaches a level not seen since the Great Financial Crisis in 2008, as perpetual concerns about trade and the health of the economy continue to weigh on the yuan.