Trump’s erratic behaviour could be a major factor in USD weakness
The USD should be rising - the US economy is doing well and the US Federal Reserve is at the forefront of raising interest rates with more to come, yet the Greenback is not responding.
Last year, USD was the second worst performing major currency falling 10% against the EUR, which admittedly had a very good 2017. Indeed, the most recent data shows that speculators have started the year by increasing their short bets against USD. Even Brexit-battered GBP moved up against USD last year.
One reason that there is less demand for USDs could be that the world economy is doing well with bullish sentiment dominating, meaning that there is less demand for safe havens such as US Treasuries.
But there might be another explanation. Some academics at the University of California think it’s due to President Donald Trump and his erratic behaviour and the constant aura of scandal that surrounds his administration with the damning book ‘Fire and fury’ being the latest instalment in this saga.
The Californian academics reckon USD carries a ‘security premium’, particularly because countries that are US allies or that rely on its military protection such as Japan and South Korea tend park most of their reserves in USD.
However, Trump has proven to be an unreliable and erratic ally, seemingly able to change policy in the blink of an eye and happy to threaten the use of nuclear weapons. This makes it less likely for foreign countries to invest their reserves in USDs, according to the academics and over last year countries did reduce their USD holdings.
It is entirely possible that Trump’s ‘America first’ rhetoric has created a political discount on USD, however, other parts of the world have been doing well recently. The commodities rally has helped many risk currencies, for instance. However, this year USD may get some boost from a possible return to problems in the Eurozone - Italy goes to the polls on March 4 with anti-EUR parties at the forefront, the Brexit negotiations are moving on to EU-UK trade and there are some early signs of disunity on the EU front. Also, German chancellor Angela Merkel is still struggling to form a government.
EUR/USD looks poised to record some of its highest levels in years as it looks set to clear a key resistance level at 1.2091. From there the pair could move up to 1.2200-1.2300 within weeks.
But before that happens, the pair look ripe for a short period of consolidation or a pull back. But that seems to be taking place. On the dailies, the pair are pulling back from their breach into the upper Bollinger band and the RSI is pulling back from over-bought levels.
Resistance can be seen at 1.2060-1.2062, 1.2089, and 1.2091. Beyond that 1.2185 and 1.2240 could be important targets for the bulls. Support is seen at 1.2008, 1.2002, 1.1982, 1.1959 and 1.1952