This morning, the US dollar erased partially yesterday losses caused by another disruption in the Trump administration. Indeed, on Tuesday, the greenback fell sharply as Donald Trump fired his Secretary of State, Rex Tillerson, and named CIA director Mike Pompeo for the job. The decision spurred widespread uncertainty in financial markets. Asian equity indices lost ground with the Nikkei and Hong Kong’s Hang Seng falling 0.87% and 0.53%, respectively. The greenback retreated against most of its peers with EUR/USD rising to 1.2413 and USD/CHF sliding to 0.9425.
I find quite surprising that the FX market reacted to the news, as the economic consequences of the decision are difficult to determine. This could explain why the US dollar bounced back this morning. In addition, this morning, Mario Draghi spoke at the ECB and sent the euro lower. The ECB president said the central bank would remain cautious not to kill the fragile but positive momentum in inflation, saying that the “monetary policy will remain patient, persistent and prudent”. The single currency fell to 1.2364 against the greenback, while EUR/CHF held steady around 1.17.
Overall, and in spite of intraday spikes in volatility, the FX market has been relatively calm since mid-January, which suggests that investors are impatiently waiting for the Fed to set the tone. It will be Jerome Powell’s first full meeting (i.e. press conference and forecast update) and investors will try to find any subtle change in tone and wording with respect to Janet Yellen last press conference. There is less than two weeks of waiting.
By Arnaud Masset