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Bob Mason
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Sentiment towards the Dollar improved on Tuesday, the upside coming off the back of hawkish commentary from voting FOMC member Harker, with the Dollar continuing to gain through the Asian session and early part of the European session.

Harker’s comments failed to materially shift market sentiment towards a March rate hike, despite his best efforts to convince the markets that next month’s FOMC meeting will be live. Yields failed to reflect the hawkish sentiment, with the probability of a March rate hike rising to just 13%, from under 10% on Monday.

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Granted that there are plenty of reasons for currencies such as the EUR and the pound to be under pressure at present, rising geo-political risk in Europe weighing, but Tuesday’s Dollar move came despite the U.S trade deficit for 2016 widening to the highest level since 2012, the narrowing in December’s deficit easing some of the pain.

Economic data out of the U.S continues to support a more hawkish outlook on monetary policy and, while there are enough doves within the FOMC to keep the rates at bay for now, hawkish commentary from voting members have a clear impact on the direction of the Dollar, the only question being whether the administration is in a position to reign in the hawks.

The December FOMC meeting minutes provided the administration with an angle to keep the FED in a holding pattern on rates, the latest trade figures likely to have given Trump further reason to attempt to bring down the Dollar, but Trump will certainly not be looking to bring down the economy, intentionally at least.

While the administration has made its best efforts to jawbone the Dollar, the reality remains that U.S monetary policy and the markets’ view on when the FED will make its first move will be the key driver for the Dollar.

A tug of war between the administration and the FED has already begun, with Yellen’s upbeat sentiment on the U.S economy having provided support for the Dollar, while Trump looked to bring down the house, ultimately advising the markets that the administration will be looking for a weaker Dollar to improve trade terms for the U.S.

Yellen et al will ultimately have the final say on the Dollar, but the administration certainly has the ability to cause the FED to hesitate over the near-term, the promise of a fiscal stimulus package the trump card, any delay in delivering likely to leave the FED in limbo through the 1st half of the year. Add to that the threat of a trade war with Mexico, China, Japan and even Germany and the possible negative effects on the U.S economy will also be good enough for the FOMC doves to rule the roost.

There’s been plenty of talk of currency wars, but such a prospect may be unprecedented, the U.S president having already been vocal on the FED and its ability to support the U.S economy.

Is a currency war on U.S soil on the offing? It certainly looks to be a possibility, which would explain the moves made by the Dollar in recent weeks, the Dollar unable to make solid ground, despite the upbeat sentiment towards the U.S economy.

Such a prospect leaves the Dollar and the markets exposed to both the FED and the administration looking to guide the markets, though in this instance, in opposite directions.

With a lack of material macroeconomic data out of the U.S today, the door is certainly ajar for the administration to step in and do some damage, FOMC members unlikely to want to tangle with the U.S president just yet in any tit for tat statements to guide the markets. Such a possibility would certainly support some profit taking ahead of the U.S session, the possibility of noise from the Oval office continuing to influence market sentiment.

At the time of the report, the Dollar Spot Index stands at 100.56, an intraday gain of 0.17, with cable standing at $1.25048, flat on the day and the EUR down 0.33% at $1.06599, the pair recovering through the start of the Europeans session, the Dollar Spot Index easing from an intraday high of 100.64.

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