Inauguration Day or Judgment Day for the Dollar

It’s been more than a week now since the president-elect’s first news conference and the markets have been on the defensive ever since, with macroeconomic data failing to spur the Dollar rally that began to unravel last Wednesday, with only the FED Chair seemingly capable of providing the Dollar with a boost on Wednesday, Draghi’s particularly dovish tones falling to leave the Dollar in positive territory at the close, the day before the Trump Day.

There’s plenty of reasons for the markets to be nervous ahead of today’s inauguration speech, the lack of direction on policies having been a material disappointment for the markets, not to mention the latest references to Dollar strength, the president-to-be in a commanding position to disrupt market dynamics and influence the direction of the Dollar and perhaps even the FED’s monetary policy decisions over the course of the coming year.

So, with the Dollar Spot Index currently up 0.22% at 101.37, touching levels not seen since mid-November before rebounding through the European session, the Index having been pegged back at sub-102 levels throughout the week, we’re in a for a relatively choppy morning session, and a rocket of a U.S session, traders the world over likely to be prepping for a U.S trading session when the world responds to Trump’s speech, voters about to soon find out if the revolution against the establishment was as good an idea as it seemed during Trump’s election victory speech back on 8^th November.

The FED has laid its cards on the table and rate hikes are to be expected through the year, with the ECB sitting at the other end of the spectrum, from a monetary policy perspective, the ECB President beating down any upbeat sentiment on inflation, with accommodative monetary policy here to stay.

The stage is certainly set for the Dollar to finally break parity against the EUR, but it’s now less to do with the intentions of the ECB or even the FED, for that matter and more to do with Trump and the new administration’s policies that are expected to rock the foundations of the global world order.

Dollar bulls will be looking for Trump to deliver the markets with a clear outline of his policy intentions within the first hundred says of his presidency and, while there has been noise that the inauguration speech will be short, as we have heard and read before, even a few words can get the markets rattled, let alone a few minutes.

We could see the Dollar surge to $1.03 levels against the EUR with 3% moves not unheard of, Theresa May’s Brexit speech having given cable a 3% boost earlier in the week, but we will need to hear the positive policy promises from back in the campaign and talks of a united America for any surge.

The shorter the speech the more uncertain the markets will be on intended policies and how the president-elect intends on running the country, which could be considered a negative for the Dollar, particularly following the latest FOMC meeting minutes, which had highlighted the Committee’s uncertainty, Trump’s fiscal policy intentions needing to be a material consideration for the FED’s rate path projections going forward.

A lack of material macroeconomic data out of the U.S this afternoon provides the markets with little else to consider ahead of the inauguration speech, the day being of significance for the Trumps, while the markets sit on the side lines waiting for what feels like judgement day, December’s UK retail sales figures scheduled for release this morning was a distraction for the day, the figures weighing on the pound, weak sales raising the alarm bells on rising consumer prices.

We have seen the Dollar managed to recover against the majors through the early part of the European session, the Dollar currently up against the EUR and the pound, cable currently down 0.33% and the EUR down 0.26%.

Based on market sentiment through the week, we wouldn’t expect to see more material moves in favour of the Dollar ahead of today’s inauguration speech.