Trump secretly desperate to strike trade deal with China
In an interview with the Wall Street Journal yesterday, Mr Trump has again used his aggressive tough-talk tactics ahead of his meeting with Xi Jinping at the G20. The US President threatened to impose tariffs on $267 billion of Chinese imports “if we don’t make a deal,” he said. Mr Trump’s unorthodox negotiation tactics have been rather controversial to say the least. But proponents would argue that he has managed to successfully renegotiate trade deals with its neighbours Mexico and Canada, while he has also made some North Korean friends. The fact that he’s applying the same approach to China isn’t a surprise. But after boasting so much about the stock market gains, he will be desperate to forge a deal now that the major US indices have turned red on the year. So, if a trade deal were to be reached, our assumption is that import duties will be lowered again which should push down import costs and therefore be disinflationary. That in turn should further reduce the urgency from the Fed to hike rates, and potentially lead to a rally in stocks and a drop in yields and the dollar.
Fed bigger problem than China: Trump
Regardless of the outcome of the US-China trade deal, the US dollar and bond yields may start easing back anyway. The recent turmoil in emerging market currencies has undeniably hurt demand. This has been highlighted, for example, by falling sales of the iPhone and a drop in German exports causing their economy to shrink in Q3. Other economic pointers in Europe have been far from impressive, raising doubts that the European Central Bank would be in a rush to raise interest rates next summer – especially in light of the recent plunge in oil prices. In the US, too, we’ve seen some softer-than-expected macro pointers lately, triggering a couple of Federal Reserve officials to talk cautiously about the prospects of further economic expansion. At the same time, the Fed’s hiking cycle has been heavily criticised by Donald Trump himself. Indeed, the US President has gone as far as to say that the “the Fed right now is a much bigger problem than China.”
Fed Vice Chairman: Gradual Rate Hikes Needed
The Federal Reserve’s Vice Chair actually ignored Trump’s warning today and maintained a hawkish rhetoric, leading to further gains for the dollar. Richard Clarida backed "gradual rate hikes," before adding that “moving too slowly could result in rising inflation and inflation expectations down the road that could be costly to reverse, as well as potentially pose financial stability risks."
In a nutshell
Taking everything into account, the Fed is still one of the most hawkish central banks out there and this is reflected in the dollar rallying. But with the pressure growing from Trump and given the recent fundamental developments, the central bank may well change its tone soon, potentially leading to a dollar sell-off.

Source: TradingView and FOREX.com.