FUNDAMENTAL FORECAST FOR THE US DOLLAR: BULLISH
- US Dollar gains most in six weeks on hawkish FOMC, dovish ECB
- Incoming comments from Fed policymakers may boost upside bias
- Trade war fears may sour risk appetite, reviving safe haven demand
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The US Dollar regained upward momentum last week, as expected. The currency emerged from a week loaded with high profile event risk with the strongest advance since late April. A hawkish monetary policy announcement from the Federal Reserve and a decidedly dovish one from the ECB did most of the work. The latter sank the EUR/USD exchange rate, which echoed as broader strength for the US unit.
The docket thins out in the week ahead, with Friday’s release of June PMI surveys amounting to the only truly eye-catching bit of economic data. That puts the spotlight on a generous offering of commentary from Federal Reserve officials. A firmly hawkish narrative that reinforces the message from last week’s FOMC meeting might help reinforce an upside bias.
Simmering trade war worries might re-emerge as well. The markets are yet to reckon with deepening fissures between the world’s top economies seen at the G7 leaders’ summit as well as growing friction between the US and China. Investors were too taken with immediate concerns – the Trump/Kim summit, policy calls from the FOMC and ECB – to digest the potential risks fully. The time to do so may be at hand.
The White House seems intent on pushing ahead with trying to bully its way to better trade arrangements. The objects of its assault seem increasingly united in pushing back however, coordinating efforts and preparing biting retaliatory measures. That sets the stage for a trade spat that might substantially disrupt critical supply chains and hurt global growth, triggering risk-off liquidation.
If such a move were to gain tangible momentum, the US Dollar may enjoy another sharp push upward. While markets would probably mark down the scope for Fed tightening against the backdrop of souring sentiment, traders primarily concerned with capital preservation are unlikely to be deterred as the greenback’s unrivaled liquidity revives its haven appeal.
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--- Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com
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