DXY Index Reversal Post-ECB; US-China Trade Negotiations Hit Snag

The US Dollar (via the DXY Index) is still trading to the topside on Thursday, although not after suffering significant losses over the past few hours. Despite hitting a fresh weekly high earlier this morning, the broad gauge of the US Dollar is now working on a bearish shooting star daily candlestick following a bounce-back performance by its largest component, the Euro. Accounting for 57.6% of the DXY Index, Euro strength following the European Central Bank rate decision and press conference now has the US Dollar on its back foot during the final 31-hours of the trading week.

ECB STANDS PAT, PROMISES INACTION

For a full summary of the ECB rate decision, you should read my colleague Martin Essex’ piece, “EUR/USD Price Falls Then Rallies as ECB’s Draghi Highlights Downside Risks”. There are some particular notes that I think are worth underscoring here and now. Notably, there seems to be a sincere desire for the current Governing Council to declare some sort of ‘victory’ before ECB President Mario Draghi’s term ends in October 2019.

As such, despite Draghi & co commenting on the deteriorating state of the Eurozone – “risks have moved to the downside” – this was the first meeting under Draghi's tenure where the ECB has shifted its language around its economic assessment at a meeting without updated economic projections. However, Draghi also said that they need to see the monetary case for another round of stimulus like a TLTRO.

Putting the pieces together, it seems that the Governing Council’s desire to start normalizing policy runs affront to their assessment that the Eurozone economy is weakening, and this cognitive dissonance means that policy won’t be changed for the foreseeable future.

US-CHINA TRADE NEGOTIATIONS HIT SNAG

Masked by the ECB press conference were comments by US Secretary of Commerce Wilbur Ross, who said that China and the US were “miles and miles” away from an agreement and he doesn’t expect a deal to come together next week. At this point, it seems like we’ve restarted the trade war news cycle: (1) Trump administration is tough on China; (2) financial markets sell off on trade war concerns; (3) Trump administration hints at US-China trade deal; (4) financial markets rally on trade deal hopes; (5) No deal materializes. In this case, US Secretary of Commerce Ross’ comments fit in with (5); don’t be surprised if rhetoric from the Trump administration heats up again.

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