Monthly Wrap: USD trending strongly as US-China trade spat reaches ‘point of no return’

Key Takeaways:

• USD monthly highs: £0.76548, €0.86806, AU$1.36735, NZ$1.49443, C$1.33676
• USD monthly lows: £0.74399, €0.84560, AU$1.31320, NZ$1.41831, C$1.29604
• Federal Reserve hikes US interest rates, urges caution on trade protectionism
• US-China trade war kicks off

The US Dollar’s rally, which has lasted for most of the year so far, continued throughout June. Investors in droves bought the currency following the Federal Reserve’s June policy decision.
The Federal Reserve hiked US interest rates – but as a rate hike had already been largely priced-in this was not the biggest takeaway from the meeting.
Instead, US Dollar investors became optimistic about the Federal Reserve’s tone, which was more hawkish than expected and increased bets that a fourth 2018 interest rate hike was likely.
US Dollar strength may have peaked in mid to late-June however, with the currency slipping from its best levels since due to a cocktail of trade uncertainties and a more dovish view on Federal Reserve interest rate hike bets.
The Federal Reserve’s June meeting minutes report was published in early-July, and generally wasn’t quite as hawkish as investors had hoped.
The bank expressed concerns that the US government’s plans for increased trade tariffs could have a negative impact on US businesses and the economy.
Despite this, the US Dollar has benefitted from developments in trade news – and has even strengthened since the US-China trade war began in early July.
For now, investors are still seeing the US Dollar as an appealing safe haven currency. It is favoured over other currencies due to the fact that it is the world’s reserve currency, as well as confidence that the Federal Reserve will continue with its monetary tightening cycle.
So what’s ahead for the US Dollar?
The Federal Reserve’s recent cautious tone is likely to remain on the minds of investors, and any more signs of domestic uncertainties would definitely weigh on Fed rate hike bets and USD strength.
Assuming US inflation continues to show sustained price pressures, markets will likely remain confident that 2018 will see four Fed rate hikes in total, but any poor key US datasets or signs of underlying weakness could change that.
For example, if US retail sales results from June disappoint next week, it could indicate that consumers are more anxious about the potential effects of a US-China trade war than expected.
The same could be said for other upcoming major US stats, like durable goods orders and growth rate figures published towards the end of July.
Of course, August’s Federal Reserve policy decision will be highly influential. It will take place right at the beginning of next month and give investors a much clearer idea of how the trade issues have so far impacted US monetary policy outlook.
Speaking of potential trade wars, some analysts claim that the US could feel a worse economic impact from the tariffs than some other nations involved – including China.
China has already indicated it will continue to issue countermeasures against US tariffs on Chinese goods, but the nature of these countermeasures remains to be seen.
If any developments are perceived as likely to have a particularly bad effect on the US economic outlook, the US Dollar could lose some of its recent solid form over the coming month.