President Trump’s tweet about a constructive conversation with President Xi

[GersonH]

The U.S. dollar traded higher on the back of the nonfarm payrolls report but it was the confusion around US-China trade relations that caused the sell-off in equities and spillover to currencies. The main takeaway from the jobs report is that it is good enough for the Fed to raise interest rates in December. 250K jobs were created last month, which was more than the market’s 200K forecast but this improvement was offset by the downward revision in September and the slowdown in wage growth. Traders were disappointed to hear that despite President Trump’s tweet about a constructive conversation with President Xi, Chief Economic Advisor Kudlow is not optimistic about US-China relations because there hasn’t been any massive movement on trade and more importantly, they have not been asked to draft a China deal. What’s even more confusing is that after these comments, Trump said he thinks a deal with China could happen. At the end of the day, while Trump and Xi could meet at the G20 meeting at the end of the month it remains to be seen whether anything substantial will come out of the meeting. As stocks resumed their slide, investors flocked into the safety of US dollars and if stocks continue to fall, the greenback will resume its rise.

There are two big events for the dollar next week – the Midterm Elections on Tuesday and the Federal Reserve’s monetary policy announcement on Thursday. According to the latest opinion polls, the Democrats could take control of the House with the Republicans maintaining their majority in the Senate. However many races across the nation are very close, so the House could swing either way. Midterm elections typically do not have a significant impact on the markets but given the controversial policies of this administration, this year’s election has become exceptionally important. We know that dollar bulls like the Republican controlled Congress because it supports Trump’s policies. So if we get a split Congress, with the Democrats controlling the House, there could be legislative gridlock that makes it difficult for policies such as the president’s middle-class tax cut to pass, which would be negative for the U.S. dollar. If the Republicans retain a majority in both houses of Congress, the president will feel emboldened to continue with his policies and the uptrend that we’ve seen in the greenback should remain intact. More specifically, if the Democrats win the House, USD/JPY could drop to 112 and EUR/USD could squeeze to 1.15. But if the Republicans control both, USD/JPY could extend to 114 and EUR/USD could slip below 1.13. With that in mind, don’t expect the midterm elections to have a long-term impact on the greenback as investors will move onto the Fed meeting and the outlook for monetary policy quickly. See more forex fundamental analysis in Alpari. 

[SwamyRaRa]

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