US Dollar Strengthens Ahead of Central Bank Guidance

The US Dollar Index has been seesawing in the aftermath of the historic meeting between President Donald Trump and North Korean Chairman Kim Jong-un. The dollar initially posted a rally, but it was short-lived as the greenback reversed its gains. The forex market will now look ahead to announcements from two of the biggest central banks, the Federal Reserve and the European Central Bank (ECB).

US Dollar Rallying

Against a basket of currencies, the dollar rose 0.3% to 93.90 before retreating from a one-week high to 93.53. In early trading in Asia, the US dollar surged 0.23% to 93.82 as traders expect the Fed to raise interest rates for the third time since December.

Against the Japanese yen, the greenback advanced to a three-week high of 110.32 yen, which is also above the 200-day moving average.

Despite Kim pledging to denuclearize and President Trump ending military exercises in the Korean Peninsula, the markets did not see any concrete results emanating from the historic summit in Singapore. Since coming to power in 2012, Kim has been opening up the Pyongyang economy, allowing a gradual rise of the free enterprise system. The US president ostensibly encouraged his North Korean counterpart to end missile testing and allocate resources to real estate development during their get together.

The USD/CAD posted its highest close in about two months on Tuesday at 1.3000. Experts are warning that the Canadian dollar may trade lower in the near-term as the Bank of Canada (BOC) adopts a wait-and-see approach to raising interest rates and the federal government continues to have a difficult time reaching a conclusion in North American Free Trade Agreement (NAFTA) negotiations.

President Trump and Canadian Prime Minister Justin Trudeau have engaged in tense relations since the end of the G7 meeting over the weekend in Quebec, which could further apply pressure to the loonie.

Markets Eyeing Federal Reserve Moves

Investors will now focus their attention to the Federal Reserve and the European Central Bank (ECB).

In addition to combing through the latest labour report and other key economic data, Fed board members will potentially factor in a brewing trade war into their final decision. But the market is optimistic that the central bank will raise rates.

Fed Chair Jerome Powell confirmed in March that changes to trade policy has had very little effect on the central bank’s outlook.

“A number of participants in the [Federal Open Market Committee] did bring up the issue of tariffs. If I could summarize what came out of it was… there’s no thought that changes in trade policy should have any effect on the current outlook,” Powell said shortly after his first news conference as head of the Fed.

“Our FOMC participants reported that they heard concerns, which were relatively new, about future trade actions,” Powell said. “They’re seeing it as a risk to the outlook. The kind of things people are talking about are more widespread retaliations, more widespread action back and forth.”

According to the CME Group FedWatch tool, the market is anticipating a 96% chance of the Federal Open Market Committee (FOMC) agreeing to a rate hike, pushing up the target rate to 1.75% and 2.00%. The US central bank is also in the midst of unwinding its massive $4.5 trillion balance sheet.

ECB Scheduled to Issue Guidance

Traders will also wait for guidance from the ECB on Wednesday as President Mario Draghi and the bank’s Governing Council weigh tapering its aggressive quantitative easing policy. Officials will be examining inflation numbers, risks to economic growth outlook, and the political crisis unfolding in Italy.

It has been six years since Draghi vowed to do “whatever it takes” to spur growth and stabilise the economies of the trade bloc. The ECB may now finally return to normal financial conditions. USD/EUR is heading towards 1.19000, attempting to surpass the 200-day moving average of 1.2010.

Conclusion

It has been an interesting start to the week for North American, European, and Asian currencies. With the Trump-Kim summit wrapping up, central banks set to issue key statements, and geopolitical tensions intensifying worldwide, the forex market might experience immense volatility in the coming days, particularly on the US dollar, the euro, and the yen.

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