The dollar received temporary support following the recent events. This is not only a temporary truce between the United States and China in a trade war: traders also responded to the meeting between Donald Trump and Kim Jong-un. The US president visited North Korea for the first time in history, inviting his odious colleague to the White House. The recession of geopolitical tensions has a beneficial effect on the greenback: the dollar index has returned to the boundaries of the 96th figure, following the dynamics of the yield of 10-year treasuries, which also shows a positive trend.
But despite the relatively good results of Donald Trump's Asian voyage, the downward dynamics of EUR/USD, and in general, the recovery of the dollar should be treated with caution. The market reaction is obviously emotional, while the parties only resumed the negotiation process, but did not solve the key problems in essence. Let me remind you that China and the United States have repeatedly interrupted and resumed negotiations, but each time the dialogue ended with a verbal conflict and another portion of additional fees. According to the overwhelming majority of analysts, after a few weeks, the White House's patience will run out if China doesn't make significant concessions and does not sign the proposed deal.
Relations between Beijing and Washington have been quite cyclical over the past year and a half: at first, Trump threatens to impose additional tariffs, then pushes the realization of his intentions, allowing the contact group to continue negotiations. But when these negotiations come to a standstill, the White House embodies the voiced threats to life, imposing new duties on Chinese imports. Now the situation has returned to the next round of this cycle, and according to most analysts, there is no reason to assume that this time the indicated algorithm of actions will change significantly.
However, judging by the reaction of dollar bulls, the market interpreted the results of the G20 somewhat differently, significantly exaggerating the optimism of recent events. This is primarily due to the situation with Huawei. Trump's decision to end the technological blockade of the telecommunications giant was really unexpected. By and large, due to this factor, the dollar is now gaining momentum, hoping for Beijing's response steps that will lead to a general de-escalation of the conflict. But, as you know, "the devil is in the details."
Just today, the head of the National Economic Council, Larry Kudlow, clarified the White House's position on this issue. He said that the corresponding statement by the President of the United States on allowing the Chinese concern Huawei to buy American products again is not an "unconditional and comprehensive amnesty." According to him, employees of the US Department of Commerce will temporarily provide several additional licenses for the supply of goods "only for the most general purpose." Kudlow said that the issue of national security has not been canceled, therefore all relevant decisions will be made by the Ministry based on this context.
It is also worth noting that this time Trump did not set out the border terms of the negotiation process. In a similar situation that developed at the end of last year, he appointed and postponed the date of the "deadline" several times. This time, the president merely announced that the new duties "will not be introduced so far". This means that at any time the White House can change its position by imposing additional duties on the remaining volume of Chinese imports. When this happens - in a week, two or several months - nobody knows.
In other words, the geopolitical uncertainty persists, and at the moment the market is only taking advantage of the moment of a thaw in relations between the United States and China. But the risks of a mid-term and long-term decline in the dollar remain, since in fact the parties remained in the same positions as before the G20 summit. In addition, we still do not know how the members of the Federal Reserve interpret the summit results. After all, the effect of the previously introduced additional duties remained in force, and they still have a negative impact on the economies of countries. Therefore, it is likely that the Fed will maintain its intention to lower the interest rate in the foreseeable future (although, perhaps, not in July).
Such prospects limit the growth potential of the US currency. At least, the current price trends should be treated with extreme caution, as the market only regains the positive moments of the past weekend, which, of course, "had a place to be." But in general, the current situation in the foreign exchange market resembles the plot of the song "Everything is fine, beautiful marquise" - the market clearly focused its attention on the positive aspects of the summit, without noticing those key problems that remained unresolved.
Such euphoria can last for several days - or even weeks if the Fed members in their speeches toughen their rhetoric and/or positively evaluate the results of the G20. The first support level is at 1.1300 - this is the middle line of the Bollinger Bands indicator, which coincides with the Tenkan-sen line on the daily chart. The next support level is 1.1280 (the upper limit of the Kumo cloud on the same timeframe). The goal of the upward movement remains the same - 1.1420 (the top line of the Bollinger Bands indicator on D1).
The material has been provided by InstaForex Company - www.instaforex.com