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US Dollar May Rise as Sentiment Succumbs to Potent Headwinds

US Dollar May Rise as Sentiment Succumbs to Potent Headwinds

Ilya Spivak, Head Strategist, APAC
USD Chart

US DOLLAR FUNDAMENTAL FORECAST: NEUTRAL

  • US Dollar remains locked in a familiar 2019 trading range
  • Risk appetite breakdown needed for a sustained move higher
  • Capitulation may finally arrive on global slowdown fears

Gain confidence in your US Dollar trading strategy with our free guide!

The US Dollar swung higher against its top counterparts last week, but prices remained firmly confined within the trading range that has contained them since the beginning of the year. The absence of directional conviction probably reflects the currency’s transition from a yield-seeking to a haven-offering asset.

Risk appetite collapsed in late 2018 under the weight of an increasingly gloomy global growth outlook coupled with a broad assortment of political headwinds. The most potent of these in the immediate term are US-China trade war negotiations and the still-uncertain path forward for Brexit.

Priced-in 2019 Fed rate hike bets evaporated against this backdrop, a shift that the central bank has since endorsed. While that understandably withdrew yield-based support for the Greenback, the downbeat mood also put a premium on its unrivaled liquidity appeal and stoked haven demand. That locked it in place.

The FOMC has loudly signaled that is in wait-and-see mode and updated forecasts that might concretely point to anything otherwise are not due until June. That puts risk on/off dynamics firmly in focus, with the cooling business cycle capping the downside but the absence of true collapse limiting upward progress.

Looking for a technical perspective on the US Dollar? Check out the Weekly USD Technical Forecast.

DOWNBEAT DATA MAY STOKE GLOBAL SLOWDOWN FEARS

The week ahead offers ample opportunities to break the deadlock. The data docket features a flood of key growth indicators including US retail sales and employment data as well as back-to-back PMI readings from key economies including China and the Eurozone. The RBA will also issue a policy announcement.

The dour trend in global economic data outcomes relative to forecasts sets the stage for disappointments on the statistical releases, fueling investors’ worries. This may be reinforced by skittish central bank commentary, stoking risk aversion and pressuring USD upward.

US-CHINA TRADE TALKS, BREXIT FIASCO MUDDY THE WATERS

Meanwhile, a delegation from Beijing will arrive in Washington for trade talks and the UK House of Commons will hold yet another round of indicative Brexit votes to gauge where MPs want to take the process. That is after they rejected a plan from Prime Minister Theresa May for a third time Friday.

Signs of progress toward trade war de-escalation might briefly boost risk appetite, but such moves are unlikely to find follow-through absent a formal agreement. As for UK/EU divorce proceedings, there seem to be increasingly few reasons to be optimistic about MPs’ ability to compromise.

On balance, that sets the stage for US Dollar gains. Whether any such move plays out within familiar territory or plants the seeds for a lasting uptrend will depend on the degree of reinforcement from a parallel collapse in sentiment. For what its worth, the bellwether S&P 500 may be setting up for just such an outcome.

--- Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivakon Twitter

US DOLLAR TRADING RESOURCES

Other Weekly Fundamental Forecast:

Crude Oil Forecast – Crude Oil May be Overextended, But Watch Out For Trade Headlines

British Pound Forecast – GBP/USD Rate Threatens Bull Trend Ahead of Brexit Deadline

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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