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Dollar rises as import tariffs boost inflationary pressures

Article By: ,  Financial Analyst
July 11, 2018 7:18 AM

Trade war concerns resurfaced overnight when news broke out that the US will announce tariffs on further $200 billion of imports from China with levies of 10% on the products. China said it was “shocked” by the news and that it will have no choice but to retaliate, adding that the actions “were hurting China, hurting the entire world and hurting the US itself.” Global stock index futures and the yuan slumped, while the US dollar appreciated on assumption that the Federal Reserve will have to hike interest rates more aggressively in order to counter the increase in the price of goods and services in the US as a result of the tariffs. The impact of import tariffs won’t show up in Thursday’s CPI report, but if it turns out that inflation was already higher than expected in June then this may further boost expectations over rising price levels and in turn sharp rate hikes from the Fed. In other words, the dollar could appreciate further, especially against her weaker rivals. One such currency is the Swiss franc, given the Swiss National Bank’s dovish policy stance.

USD/CHF could break higher

The USD/CHF could therefore be an interesting pair to watch for a potential breakout in the coming days. The Swissy currently resides inside a short-term consolidation pattern after its rally from mid-February stalled in May around 1.0050. The tight consolidation since then has allowed the Relative Strength Index (RSI) to work off its overbought conditions. With the USD/CHF still technically bullish and RSI no longer suggesting rates are overbought, a new rally could commence soon. A breakout above the triangle pattern could push rates initially to parity and subsequently above resistance around the 1.0050 hurdle next. And should there be acceptance above 1.0050 this time around then we could see the onset of a more meaningful rally thereafter, possibly to a new high for the year above the old high of 1.0340. However, if the Swissy breaks from the consolidation to the downside then all bets would be off. In this potential scenario, a re-test of the 200-day moving average at 0.9745 or key support around 0.9635-50 area would not come as major surprise to us. But our base case is that rates are probably going to break higher for the reasons stated above.


Source: TradingView.com and FOREX.com.

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