Dollar suffers, US stocks recover, US-China dispute in focus again

Summary:

• US dollar suffers following the news that the Federal Reserve will look at “strategies, tools, and communications practices” the Fed uses in conducting policy

• US stocks gained but the move could be temporary

• US-China trade battle gets back on the table as the G20 summit looms

Powell sends dollar lower

The US dollar suffered in late European trading on Thursday following the Federal Reserve’s announcement. The US central bank said that in 2019 in will launch a broad look at how it conducts its policy. In a statement Fed Chairman Jerome Powell said “With labor market conditions close to maximum employment and inflation near our 2 percent objective, now is a good time to take stock of how we formulate, conduct, and communicate monetary policy”. Even as such a review has been a topic discussed at recent FOMC meetings, it was enough to dissuade many traders from buying the greenback. Let us recall that a day earlier Powell was a speech where he indirectly suggested that the Fed might be nearing the end of the ongoing monetary tightening cycle, so the report released yesterday added fuel to the flames. Now it looks that the Federal Reserve remains on track to continue hiking rates next year (three moves are expected), however, beyond the following year the outlook for next rate increases appears to be blurry. Admittedly, in its latest dot-plot the Fed pointed to yet another hike in 2020 albeit it will be contingent on how the economy performs. Assuming that fiscal policy will not be looser after the House was taken over the the Democratic party, and economic growth will slow down since the beginning of the next year, one may arrive at a conclusion that there will no needs to tighten monetary policy even more. Therefore, it is likely that the tightening cycle will end as soon as next year exactly when other central banks in the world, including the European Central Bank, should begin rising rates. This looks as an unfavourable mixture for the US dollar - the most overvalued major currency in the world.

As the week is coming to an end it is worth looking at the weekly chart of the EURUSD. The pair seems to be poised to draw an encouraging candlestick being able to stay above 1.13. This implies that we may count on a rebound in the nearest future. Source: xStation5

Low chances for breakthrough in trade war

Meanwhile, the stocks market was buoyed by the same comments suggesting that borrowing costs may have their limits to increase yet more. As a result, the SP500 (US500) added 1.1%, the NASDAQ (US100) closed 1.7% higher while the Dow Jones (US30) moved up 0.8%. Nevertheless, optimism did not last too long and was not shared among Asian investors. The reason is again the trade battle between the United States and China. Namely, we were offered some comments overnight saying that any breakthrough at the G20 meeting is unlikely. Similar comments shared US Commerce Secretary Wilbur Ross suggesting that “President Donald Trump and China’s Xi Jinping are likely at best to agree to a framework for further talks to resolve trade tensions”. Other US officials were cited as saying that China’s offers on trade should be view with scepticism. On the other hand, there were some a bit more positive revelations from US Trade Representative Lighthizer as he denied that he said that a next tranche of tariffs on China is in the pipeline. In turn, the China’s ambassador to the US, citing a message from Chinese president, said that the country is ready to work with the US on cooperation and it (China) will not stop reform and opening markets. Overall, the net effect is negative with the SP500 futures trading 0.3% lower this morning. The Shanghai Composite is higher 0.5% but the Hang Seng (CHNComp) is down 0.2%. The Japanese NIKKEI (JAP225) closed the week with a 0.6% decline after the yen surged on mounting risks.

The US500 drew a bullish engulfing on Thursday suggesting that we may experience a bounce in the days to come. Note that this pattern occurred nearby the important technical level (ca. 2700 points) increasing odds for a resumption of gains in the near-term. If so, bulls could attempt to head toward 2815 points. Source: xStation5

In the other news:

• New Zealand’s manufacturing PMI increased to 53.5 from 51.9 in October

• Oil prices rebound, WTI trades 0.9% higher, Brent gains 1.1%

• US 10Y yield steadies nearby 3.11%