Dollar falls on Protectionism Fears

Economic advisor leaves White House

White House economic advisor and former Wall Street Banker Gary Cohn left the Trump administration yesterday as fears that the President is going to push ahead with a series of tariffs on imports, starting with steel and aluminium, which would lead to a policy of protectionism and start a trade war.

The dollar had recovered on Monday as traders started to believe that the threat of protectionist policies was a ploy by Trump to get America’s trade partners around the negotiating table to discuss deals that have been done that are seen as disadvantageous to the U.S. Cohn’s departure changes the dynamic of the reasoning behind the tariffs and brings a trade was closer.

Concerns over the potential for tariffs on U.S. imports are now the major influence that is pushing the dollar lower, which ironically, is the purpose of the policy in the long run. With the February employment report due for release on Friday attention will be drawn back to the economy but the protectionism story has the potential to run and run.

The dollar fell yesterday with the index reaching 89.50 before closing a little higher. It has resumed its downtrend overnight, again testing support at 89.50.

Considering your next transfer? Log in to compare live quotes today.

ECB meeting to spring a surprise?

The meeting of the Governing Council of the European Central Bank which starts today has driven rumours that Mario Draghi is about to announce a change in the bias of monetary policy from easing to neutral.

In itself, this is a minor change, but it has the potential to push the Euro higher since it signals an acknowledgement that the Eurozone economy is sufficiently robust to grow without the stimulus of lower rates.

ECB President Draghi has been at pains over the past year to say that the Eurozone economy remained fragile with several weaker economies unable to sustain growth without the benefit of economic stimulus. A change in the bias removes the need for that support, verbally at least, and brings a normalization of rates a step closer.

The single currency jumped on the rumour reaching a high of 1.2421 and remaining close to that level for most of the day. A rise in the Euro is a consequence of tighter monetary policy and presumably Draghi now feels that such a move won’t damage export growth too much which will signal the market to take it higher and possibly through the medium-term resistance at 1.2520.

Eurozone Q4 GDP is due for release later this morning with an unchanged 2.7% QoQ read expected.

Brexit threat retreats; Sterling rises.

It is incredible how the market tends to put Brexit out of its mind every time the effect of a flurry activity over the UK’s departure from the EU comes and goes. A Hard Brexit is now becoming more likely since the Government seems completely unwilling or unable to produce a coherent package of measures that are anything other than reactive and therefore allow Brussels to dictate terms.

The pound recovered lost ground yesterday mostly based upon the weakening of the dollar over the threat of tariffs on imports.

It reached 1.3930 and closed at 1.3888. Overnight it has resumed its move higher following Gary Cohn’s resignation and is currently (06.30am) trading at 1.3898. Versus the single currency it is in a 1.1250/1.11250 range with a higher euro possible based upon interest rate expectations.

It is probable that if the pound stretches its rally closer to 1.4000 selling orders will be triggered as traders see it as a “good sell” safe in the knowledge that at some point there will be further negative Brexit headlines to push it lower.

For now, the pound remains in a reactive phase since Brexit has become its main and possibly only driver.