MARKETS: Team Trump jumps on Dollar strength

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By Jameel Ahmad, VP of Market Research at FXTM

So it is time to attack the Dollar? That was the name of the game on Tuesday after the Dollar went on a wild tumble following comments from Peter Navarro, the head of President Trump’s National Trade Council that Germany was using a “grossly undervalued” euro to gain advantage over the U.S. and its own European Union neighbours.

This was later followed by outspoken comments from Donald Trump himself when he implied during a meeting with senior pharmaceutical bosses that currency devaluation from other countries had increased the probability of drug makers outsourcing their production, as he calls on these companies to turn production back to the United States.
While the USD has stabilised somewhat since the attack on its strength on Tuesday, investors continue to be kept on their toes towards pricing in some political risk premium into the new U.S. President after getting carried away beforehand on growth promises and these fundamentals are expected to continue driving markets.
Investors must be aware that the Trump rally was encouraged on promises of economic growth, deregulation, fiscal spending and job creation. Yet there is still a large element of political risk that was ignored with Trump famously known to favour protectionist and other far-right policies. Also, in order for this era of protectionism to work, Trump does need a weaker Dollar, otherwise it will become counterproductive to his economic plan as U.S. President. You can promise to cut taxes, deregulate and offer additional incentives to encourage business in the United States, but unless you are as competitive as your competition overseas, corporations will continue to favour doing business in locations where operating costs are lower.

Dollar still slipping against EM currencies

Despite the Dollar having stabilised after suffering heavy losses against its main trading partners, the Greenback is still slipping against most emerging market currencies in Asia ahead of the Federal Reserve interest rate decision Wednesday evening. While the Fed is expected to continue indicating its bias towards raising US interest rates higher more than once in 2017, the general consensus is that rates will be left unchanged for now and this is providing support to Asian currencies seen as being the most vulnerable to higher US interest rates.
The biggest risk for the Dollar heading into the US interest rate decision is if the Fed indicates an air of unease around the unknown Trump fiscal policy agenda.

British MPs set to vote on Brexit bill

Don’t forget that with Trump continuing to attract all the limelight, MPs in the United Kingdom are set to vote later Wednesday whether to give Theresa May the green-light to get Brexit negotiations underway. This day represents the conclusion of the debate in parliament that has lasted two days and is expected to end with the Prime Minister getting the nod of approval to begin Brexit negotiations, with reports suggesting on Tuesday that PM May aims to invoke Article 50 on March 9.
This should have some ramifications on the British Pound, while the recent news that the UK economy is expected to slow down over the next couple of years also provides another risk to investor sentiment.
On a general level, however, global economics are being ignored with market volatility being driven by this new era of political risk becoming common across the developed world.

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