The dollar continues to find steadier footing on the week, with Trump’s latest tariff threats looking like he might just come down hard against many countries when we get to 1 August. In the bigger picture, the latest dollar gains isn’t too significant after having been battered down amid the policy incoherence and loss of credibility/confidence. The question now is, how much of that has already been priced in?
Heading into April, markets were fearing armageddon but instead we got treated to the first round of TACO trades. But by now, we’ve adjusted to the reality that Trump loves to talk up a big game before pulling back, then calling whatever terms that were watered down to be “the best deal ever”.
As we look towards 1 August, is all of this already priced in? That’s a key consideration to be mindful of.
In the case of the dollar, we’ve seen shorts pile in over the last few months and it is now really crowded. A short squeeze can’t be ruled out but what about a larger correction? If the script has flipped, then there will be some pain to be had if markets have gone too far in pricing in TACO at every stage.
Think of it as a meter of sorts. We went from the side of full on fear about tariffs and a US-China trade war all the way to the other end where we believe that Trump is pretty much the boy who cried wolf. In that sense, markets have priced in the belief that nothing will come of Trump’s big threats no matter what.
So, the question is what happens now as Trump looks to push forward with more tariffs on 1 August?
The TACO belief states that markets will continue to do what it has been doing over the past few months. But what happens when Trump finally delivers something as he will have to square up his “deals” at some point?
For now, the threat of that is keeping broader markets on edge with the dollar finding some support with most of the downside already priced in. I would say most of the tariffs that will be put into effect are priced in by now but still, that only means that we might have hit the wall in terms of gauging the pain threshold for the dollar.
The greenback is holding firmer today with USD/JPY testing waters above 147.00 after having held its ground near the 100-hour moving average:
USD/JPY hourly chart
Meanwhile, EUR/USD is down just under 1.1700 while USD/CAD jumped up earlier to above 1.3700 after Trump announced 35% tariffs on Canada.
However, are we due a stronger correction in the dollar and stocks? That might be a little early to tell. But from price action this week, it is suggestive that the dollar might be looking to plant the seeds for that in the coming weeks. Just some food for thought.
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