FX: Nothing Matters More than Trade. Not ECB, Not Fed.

Nothing matters more to the direction of currencies over the next few days than President Trump's Chinese tariff decision. That includes this week's Federal Reserve and the European Central Bank's monetary policy decisions. On Wednesday, Jerome Powell left interest rates unchanged but made it clear that rate hikes are not on the horizon until inflation increases substantially. The US dollar fell slightly but the losses were limited particularly for USD/JPY and today, the greenback soared against most of the major currencies following reports by the Wall Street Journal that US negotiators offered to cut tariffs by 50%. Euro which traded as high as 1.1154 against the US dollar also gave up its gains to end the day lower. It is important to realize that there still hasn't been any official announcements but between Trump's tweets and reports by the media, there's more reason to believe that minimally, tariffs will be delayed. But as we've learned the hard way, his attitude and decisions can change last minute so until he makes an official announcement which must occur before December 15th, the tariffs could still be be imposed.

Meanwhile there were some important but subtle shifts in the European Central Bank and FederaI Reserve's outlook this week. Christine Lagarde presided over her first ECB meeting and she kicked off her term with optimism. Instead of emphasizing the vulnerabilities in the economy and the need for ongoing stimulus, she said the risks were less pronounced and there are signs of a mild increase in core inflation. To further that point, the ECB even upgraded its 2020 GDP and inflation forecasts. When asked if she is dove or a hawk, she said that she strived to be an owl, the bird of wisdom. ECB President Lagarde's conscious effort to ring the bell of optimism at the start of her term suggests that she's not as dovish as her predecessor. Whether she'll get tough on inflation or let prices run higher before tightening remains to be seen but her tone along with all of the improvements in Eurozone data since the last policy meeting suggests that she is in no rush to ease again. As a result, in the near term we expect a further recovery in EUR, particularly against the Japanese Yen and Swiss Franc.

In contrast, Federal Reserve Chairman Jerome Powell focused more on the lack of need for tightening than the improvements in the US economy. Like the ECB, the Federal Reserve left interest rates unchanged. GDP projections were left at prior levels but the central bank now sees inflation growing at a slower pace this year. Most importantly, there was a downward shift in the dot plots with policymakers on balance seeing no changes in interest rates in 2020. Fed Chairman Powell reinforced the outlook for steady rates next year when he said the Fed wants to see a move in inflation that is significant and persistent before raising interest rates. Retail sales are scheduled for release on Friday and while stronger numbers are expected, the sustainability of USD/JPY's move through 109 hinges upon the delay of Chinese tariffs. EUR/USD on the other hand should extend its gains as investors adjust to the near term shift in the monetary policy biases of the ECB and Fed.

Its election day in the UK and by tonight, we should know if Boris Johnson stays on as Prime Minister or loses his seat to Jeremy Corbyn. Sterling gave up some of its gains as the polls tighten but a conservative victory is extremely likely. If we're right, sterling will resume its rise as political uncertainty abates. However if the election is an upset and Corbyn succeeds Johnson, it will be a wild night for the currency.

The Australian dollar extended its gains while the Canadian and New Zealand dollars were relatively unchanged. Consumer inflation expectations held steady while migration in New Zealand increase. Manufacturing activity in New Zealand slowed but the currency was unfazed. Bank of Canada Governor Poloz spoke today and while he did not say anything specifically about Canada's economy, he said the global economy is set for continued slow growth.