It’s been a good second half of the week for the dollar, mostly thanks to positive trade news and a hawkish Federal Reserve. The next big catalyst for the dollar will be the outcome of initial US-China trade talks, but US equities have already drawn some support from US President Donald Trump’s more upbeat tone on upcoming negotiations with Beijing and the US-UK trade deal announced yesterday, ING's FX analyst Francesco Pesole notes.
US trade developments remain the single biggest driver for USD
"The US data calendar only includes the Federal budget balance for April, but there are a few Fed speakers to watch. Two dovish-leaning members, Michael Barr and Christopher Waller, both speak today. Lately, Waller has stressed that tariff-led inflation should be temporary, and it will be interesting to see whether more neutral members endorse this view. None of the hawks are speaking today, and the overall message may be slightly dovish-leaning."
"This week, the Fed sounded anything but dovish. Still, there's a risk that Chair Jerome Powell’s current stance is overly cautious given high uncertainty on tariffs – perhaps to reaffirm the Fed’s independence in the face of Trump’s easing calls. Single Fed speakers may show more openness to cutting rates and prevent the hawkish repricing in the USD OIS curve from going much further. Current pricing is for 68bp by year-end, with the first cut in September."
"Anyway, US trade developments remain the single biggest driver for the dollar, and the consolidation of bullish USD momentum requires a constant flow of positive news on trade deals – especially with China. For this week, most of the positives from improved trade sentiment may already be factored into the dollar, which may fail to find more support today, especially if Fed speakers sound a bit more dovish than Powell."
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