US Congress elections were deemed as the main source of “headwinds” for Trump’s somewhat reckless policies, so the market was in no hurry to make guesses on the long-term consequences of the president’s threats and initiatives, betting on the temporary freedom of White House’s power. The division of power in the United States between the two rival parties happened according to the baseline scenario: The Democrats won the House of Representatives, while the Republicans retained control of the Senate.
The strengthening of power in the hands of the Democrats identified a bearish outlook for the dollar, which has been extending a signal for rally from the contradictory chain of relationships between US tariffs and the Fed’s actions over the course of the last three months. Today, the US dollar index lost about 0.2% after a short rally in Tuesday’s session.
Restoring the balance of power clearly promises to delay the war with China, as Trump will have to overcome the additional resistance of opponents and spend more time on the next steps to escalate the conflict.
The dollar could be supported by the Fed on Thursday. Tomorrow, Powell will announce the interest rate decision, but it is likely that during the press conference he will repeat the mantra about the benefits of raising rates to preserve the historically rare state of the economy (low inflation & low unemployment). It will be curious to see the opinion of the regulator about the recent market correction, in particular, how positive feedback can influence the Central Bank’s plans to raise the rate.
In my opinion, since the plans for the long-term bear market have failed and the S&P 500 is targeting the main resistance at 2800, the chances for the Fed to slow down become even smaller. According to some estimates, the fall to 2400 could be a trigger for the Central Bank, but with a distance from dangerous levels, one should be inclined to favor a bullish interpretation of the decision on Thursday.
Tomorrow there will be a whole series of data on China’s foreign trade (export / import / trade balance), which will probably confirm the recent decline in production rates and a slowdown in export activity.
Since the economy has clearly entered a phase of slowdown, the data will probably be interpreted on a scale from “neutral” to “negative”. Unfortunately, there is no chance to talk about positive economic reports now, as structural imbalances in the economy do not have the possibility for a quick elimination and the indisposition may be prolonged. Data on foreign direct investment will probably be able to save the mood. If external support from investors beats expectations, we can expect the leveling effect of this indicator on foreign trade readings.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.