Dollar could weaken but not because of Trump

The US dollar was on course to end sharply higher yesterday until Donald Trump spoke. While the greenback has steadied and could still push higher, market participants are now in no doubt what the President thinks of the currency’s growing value and rising interest rates in the US. But can he actually do anything to stop them rising? Trump has rightly said he’s leaving monetary policy decisions at the hands of the professionals and economists at the Federal Reserve and that the Fed’s president, Jerome Powell, is a good man. But some would argue – and dare I say – that Trump is being a bit of a hypocrite here. How can you have lower interest rates and a weaker currency when you have an expansionary fiscal policy stance? He was the one who cut taxes and promised or delivered big spending aimed at creating jobs and raising incomes. What’s more, protectionist policies are raising import costs, leading to higher inflation. It is the Fed’s mandate to control inflation and the only way to do that is by tightening monetary policy. You can't have your cake and eat it.

Dollar could ease a little anyway

That being said, the dollar could fall anyway because of profit taking. A hawkish Fed and two rate rises this year might already be priced in. What’s more, the next important US macro data is not scheduled until next Friday: GDP. Thus, the dollar bulls may have the perfect excuse to take profit on their positions accumulated over the past three months or so. The greenback could also come under pressure because of profit taking in other major pairs such as GBP/USD, which has been hit hard of late, and USD/JPY following its sharp gains recently. The euro could rebound ahead of the ECB next week, while the Canadian dollar may find some support in response to today’s release of CPI and retail sales from the North American nation.

Bargain hunting may support precious metals

Furthermore, downbeat gold and silver could also comeback against the dollar as the shorts take profit following hefty falls of late, while bargain hunters might find the metals attractive at these levels. After all, trade war concerns are still there. Indeed, Donald Trump has warned he’s ready to put tariffs on all $500 billion of Chinese imports, while Angela Merkel has said the EU is ready to retaliate against any US auto tariffs.

Dollar Index and USD/JPY print bearish price patterns

From a technical point of view, the Dollar Index and USD/JPY have both created bearish-looking candlestick patterns at their respective resistance levels of 95.50 and 113.00 on the daily time frame. These patterns point to short-term pullback and will remain valid for as long as these levels hold on a closing basis. Ultimately, the longer term trend remains bullish until the charts tell us otherwise i.e. when there is a break in market structure of higher highs and higher lows.