With President Trump and Xi holding an important meeting at teh G20 summit, the US dollar has rebounded. However, is this a move that will simply dissipate again, or something more sustainable? We consider the implications for forex, equities and commodities markets.
For financial markets, the G20 summit has been all about the meeting between Presidents Trump and Xi. The trade dispute between the world’s two largest economies has ebbed and flowed in recent months, with wild swings in expectations of the outcome. Since the talks broke down a couple of months ago, markets have had to price for the worst case scenario. The US economy may have a degree of insulation, but a sustained global slowdown would impact negatively the US and, by extension, impact on Fed monetary policy. Trump’s meeting with Xi seemingly went fairly successfully, albeit without any slam-dunk moment. However, trade negotiations are set to resume now, so prospects of a resolution have improved. Tariff increases are on hold, so for now, traders can breath a little easier. Pricing for four rate cuts in the coming 12 months seems extreme if this is the case. Fed Funds futures have priced for a guaranteed cut in July. However, an immediate July cut is now distinctly questionable. The 10 year Treasury yield has dropped 50bps in the last two months, a move likely to consolidate or see some retracement. As such the dollar is rebounding today. Fed chair Jerome Powell was recently keen to project an air of wait and see for the FOMC, with data dependence important. With the US/China trade tensions on a better footing once more, the dollar looks set to gain near term, at least into Friday’s payrolls. Inflation indicators will be key and subsequently, wage growth crucial. If the data holds up, Fed cut prospects will unwind and the dollar rally.