Focus on the dollar and the Fed during today's European session

American President Donald Trump caused a sharp correction in the dollar index (DX) after he blamed the EU and China for manipulating their currencies and, separately, complained that the policy of tightening by the Fed is not supportive of his efforts to negotiate a trade deal with China. The Fed, however, is based primarily on the principle of independence from the executive branch of government: an extreme example of what happens when the executive branch manipulates the central bank is Turkey. Trump wants a weaker dollar to make American exports more competitive and lower rates to stimulate the economy. With his remarks, however, he risks harming the trust that investors have vested in the dollar and the American financial system. This level of trust is also one of the reasons why American markets have been able to maintain a bull run while other equity markets have entered bear territory. Also, as the world's reserve currency (accounting for 66% of central bank reserves worldwide), the dollar is the currency of choice for investors. This explains the tendency for the dollar to rise along with American equity markets: a tendency demonstrated by Gina Martin Adams, Chief Equity Strategist at Bloomberg Intelligence.

Trump's remarks also coincide with a Federal Reserve symposium at Jackson Hole. Traders should monitor any news from the symposium. Tomorrow (22.08.2018) we expect the release of the last FOMC minutes.

After Trump's remarks EUR/USD broke the key resistance level of 1,15. The Turkish lira, a barometer of investor risk appetite in the past weeks, held around USD/TRY 6,15. GBP/USD reached 1,284 - the pair began an upwards trend on the 15th of August after bottoming at 1,265. EUR/GBP also rose, reaching a peak around the key resistance of 0,9. The upwards trend in the euro-pound also began on the 15th of August. We will track these two pairs for a confirmation or rejection of the recent upwards trend. October is nearing - this is when the EU and Britain should reach a preliminary deal on Brexit, before the official exit in March 2019.

Movements in the dollar and news from Jackson Hole (as well as tweets by the President) will likely move European markets today. European indices are expected to close slightly lower today, as reported by IG. The optimism sparked by the renewal of US-China negotiations will likely be erased by President Trump's remarks on currency manipulation. This optimism was likely unfounded, given that at this point neither side seems willing to compromise.

Technical picture: DX, dollar index

We believe that after today's correction, the DX presents favorable levels for entering long positions in the trend. Given the change in fundamentals, however, we believe that any position in the DX (long or short) should be entered cautiously given the change in fundamentals:

1. Expect short-term volatility from tweets or remarks from the President, as well as any news from Jackson Hole. The fundamentals are still favorable, perhaps even more so: the Fed will likely try to insist on its independence from the executive branch by staying the path of QT.
2. DX faces a Fibonacci 50%, which is significant (even if the index already broke it once).
3. MACD: Slight divergence between the fast MA and the price's slump. This is another reason for traders to be cautious.

DX components:

EUR/USD - 57,6%

USD/JPY - 13,6%

GBP/USD - 11,9%

USD/CAD - 9,1%

USD/SEK - 4,2%

USD/CHF - 3,6%

We expect public sector borrowing from the UK at 11:30 Sofia time. Later today at 16:00 we expect the U.S. Redbook Index.

Source: CNBC

Original post: CNBC

Image: pixabay.com

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