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by Charalambos Pissouros

USD Falls on Trump’s Remarks, US-China Talks Begin

The dollar came under selling interest on Monday after US President Trump once again criticized the Fed for raising interest rates. The overall positive market sentiment ahead of the US-China trade talks may have also kept the greenback weak as investors continued to divert flows out of the safe-haven currency.

Trump “Not Thrilled” Over Higher Rates, US and China Restart Talks

The greenback remained on the back foot against all the other G10 currencies yesterday, pressured by US President Trump’s remarks over higher interest rates, and also as investors continued to divert flows out of the safe-haven currency ahead of the US-China trade talks. Indeed, the risk-on market mood is also evident by the performance of global equity markets. Major European and US stock indices were a sea of green yesterday, while during the Asian morning today, Japan’s Nikkei 225 and China’s Shanghai Composite Index were up 0.20% and 1.30% respectively.

USD performance G10 currencies

Today, the US and China are expected to begin a round of two-day talks, just before Thursday, when tariffs on USD 16bn worth of products targeted by each country go into effect. Although the market has reacted positively on the news that the two sides are willing to return to the negotiating table, market chatter suggests that some are worried the talks may not bear fruit, given that they involve lower-level officials and that the gap between the two nations is still big. Even US President Trump told Reuters yesterday that he does not expect much progress from this round of talks. What’s more, the US Trade Representative’s Office will also hold hearings this week on the next round of tariffs, which will target USD 200bn worth of Chinese goods.

In our view, if indeed this week’s talks do not bear fruit, the market may switch to risk off, with investors abandoning riskier assets in favor of safe havens. However, bearing in mind Friday’s reports that the two countries are working on a road map that would eventually lead to a meeting between US President Trump and Chinese Leader Xi Jinping in November, such a switch may remain limited and/or short-lived. Even if this round does not produce results, expectations that further talks may lead to top-level meetings could keep market sentiment relatively supported.

Now back to Trump’s remarks, besides saying that he does not expect much from this week’s trade talks, he also commented on the Fed’s plan over higher interest rates. He said that he is “not thrilled” with the Fed Chairman Powell’s decision to keep raising rates and that the Fed should be more accommodating in order to help him boost the economy. He also accused China and Eurozone for manipulating their currencies.

As for what we believe, we stick to the view we held the last time Trump criticized the Fed over tightening monetary policy, back in July. We don’t expect the Committee to change course as the last thing officials may want is to hurt investors’ faith over their independence. With the economy performing at a “strong rate” as the Fed itself noted in its latest meeting statement, we see no reason for interest rates to stop rising at the moment. On Thursday, the Jackson Hole economic Symposium begins and on Friday, Fed Chair Powell is scheduled to step up to the rostrum to speak on “Monetary Policy in a Changing Economy”.  We see it likely that he maintains an upbeat tone on the US economy and keeps the door wide open for two more rate hikes by the end of this year. According to the Fed funds futures, the market implies a 94% probability for the next rate increase to occur in September, while there is a near 62% chance for another one in December.

With regards to Turkey, Trump said that the US will not make any concessions to Turkey in order to secure the freedom of the detained pastor, which suggests that an immediate resolution of the stand-off between the two nations may be distant.

USD/JPY – Technical Outlook

USD/JPY tumbled yesterday following Trump’s remarks over the Fed’s decision to raise interest rates, breaking below two support (now turned into resistance) barriers in a row. That said, the slide was stopped slightly above the 109.70 support zone and then the rate rebounded somewhat. The rate continues to trade below the tentative downside line drawn from the peak of the 1st of August and thus, we will consider the near-term outlook to be negative for now.

However, taking a look at our short-term oscillators, we see a decent likelihood for the latest recovery to continue for a while more before the bears decide to shoot again. The RSI turned up after hitting its 30 line, while the MACD, although below both its zero and trigger lines, shows signs that it could start bottoming soon.

A clear and decisive move above 110.10 could confirm the case of further recovery and could open the way for the 110.45 resistance, from where the bears could jump back into the game and push the rate down for another test near the 109.70 zone, marked by the low of the 27th of June.

Now, in case the rate continues to recover above 110.45, we will still stay cautiously negative as the pair would still be trading below the aforementioned downside resistance line. We would like to see a decisive break above that line before we start examining whether the near-term outlook has turned positive. Such a break could initially aim for the 111.15 resistance, the break of which could open the way for our next obstacle of 111.50.

USD/JPY 4-hour chart Technical Analysis

S&P 500 – Technical Outlook

S&P 500 traded somewhat higher yesterday, but remained below the 2863 resistance hurdle, which is the upper bound of the sideways range the index has been trading within since the 12th of July. Bearing in mind that the price continues to trade within that range, we would consider the near-term outlook to be neutral for now.

Having said that though, taking also into account that the prevailing medium-term trend has been to the upside, we would see a decent chance for the bulls to push the index above the upper bound of the range and aim for the all-time high, near 2877.

Shifting attention at our short-term oscillators, we see that the RSI, although above 50, has flattened and now points sideways, while the MACD stands above both its zero and trigger lines, but shows signs of topping. These indicators suggest that a setback may be looming before the bulls take charge again, perhaps for a test near the 2847 or the 2833 support levels.

Now in case neither of those levels holds and the price falls below 2833, this could be a sign that investors want to keep the index within the aforementioned range. Something like that could open the path towards the 2802 territory, defined by the low of the 15th of August.

S&P 500 4-hour chart Technical Analysis

As for the Rest of Today’s Events

Apart from the US-China trade talks, the calendar appears very light today. The only indicators worth mentioning are the UK CBI industrial trends orders for August, Canada’s wholesale sales for June, and New Zealand’s GlobalDairy Trade Price Index.

Tonight, during the Asian morning Wednesday, we get New Zealand’s retail sales for Q2. Expectations are for both headline and core sales to have accelerated to +0.4% qoq and +0.8% qoq from 0.1% and 0.6% respectively.

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