Trump Tariffs and Trade War Fears Support US Dollar

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Headlines

  • US Announced Intent to Impose High Tariffs on Steel and Aluminium – AUD exchange rates softened by threat to global trade outlook
  • Brexit Jitters Kept Pound Under Pressure as UK and EU Remain at Odds – Stronger services PMI may offer rallying point
  • Canadian Dollar Slipped on Fresh Worries Over Future of NAFTA – CAD vulnerable to deterioration in trade conditions
  • USD Gains Limited as Markets Assessed Domestic Impact of Trade Policy – Tariffs may hinder rather than help US economy

Australian Dollar

After the Trump administration announced its intention to impose harsh tariffs on steel and aluminium imports the appeal of the commodity-correlated Australian Dollar diminished sharply. The prospect of a global trade war is distinctly negative for the outlook of the Australian economy, particularly if base metal prices are the ultimate subject of the turmoil. As global stock markets slumped on the back of the news, and investors piled back into safe-haven assets, there was little in the way of support for AUD exchange rates.

Any signs of softening in February's services PMI could put further pressure on the Australian Dollar today, especially if market risk appetite remains limited.

Sterling

Friday proved to be a rather volatile day of trade for the Pound, with investors jittery on account of Brexit once again. Reaction to Theresa May's latest speech on the subject was rather mixed, as markets remain wary of the UK losing its easy access to the EU single market. With the UK and EU still looking rather at odds over the desired shape of their future relationship the situation looks set to keep Sterling under pressure for some time to come.

Even so, a stronger showing from today's UK services PMI may offer GBP exchange rates a rallying point if the sector demonstrates resilient growth.

Euro

Even though January's German retail sales data failed to rebound as far as forecast this still offered support to EUR exchange rates. As the Eurozone economy continues to show solid signs of economic strength the downside potential of the Euro is somewhat limited. However, with a sense of political uncertainty mounting ahead of the latest Italian election the gains of the single currency remained fragile. Worries over the future of the proposed German coalition government also weighed on the minds of investors.

With no change forecast for the finalised Eurozone services PMI the Euro may find itself lacking in particular momentum this evening.

US Dollar

While the US Dollar initially pushed higher in response to the Trump administration's planned metal tariffs it struggled to maintain this momentum heading into the weekend. This is due to the likely negative net impact that the measures will have on the world's largest economy, given the relatively small size of its steel industry. Even though the US Dollar still performed well against more risk-sensitive currencies during Friday's European session the general bullishness of USD exchange rates was tempered.

Although February's ISM non-manufacturing composite index is forecast to see a slight loss of momentum on the month this is unlikely to significantly dent the US Dollar.

Canadian Dollar

Confidence in the Canadian Dollar deteriorated amidst the general increase in market risk aversion, with investors spooked by the protectionist rhetoric of the Trump administration. This sparked fresh fears over the future of NAFTA, which could well be at risk if the US continues to shift its policy on trade in this direction. A weaker-than-forecast annualised fourth quarter Canadian gross domestic product result also put pressure on CAD exchange rates.

Fears over the global trade outlook are likely to keep the Canadian Dollar on a weaker footing today.

New Zealand Dollar

As New Zealand building permits showed a modest rebound on the month in January this offered some support to NZD exchange rates. Even so, with market risk appetite diminished by the threat of a fresh global trade war the upside potential of the New Zealand Dollar was rather muted. A slight uptick in the ANZ consumer confidence index offered additional encouragement to the 'Kiwi', though, suggesting that the domestic outlook is improving.

If the ANZ commodity price index also pushes higher on the month this may encourage greater demand for the New Zealand Dollar in the short term.

Data Released

March 5th 08:30 AUD Services PMI (FEB) 53
March 5th 10:00 NZD ANZ Commodity Price Index (FEB)
March 5th 19:00 EUR Eurozone Services PMI (FEB F) 57.5
March 5th 19:30 GBP Services PMI (FEB) 53.4
March 6th 01:00 USD ISM Non-Manufacturing Composite Index (FEB) 58.5

Post by TorFX

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