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US Dollar Uptrend May Return on Haven Demand, Dovish ECB, CPI Rise

US Dollar Uptrend May Return on Haven Demand, Dovish ECB, CPI Rise

2019-09-09 00:30:00
Ilya Spivak, Sr. Currency Strategist
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US DOLLAR FORECAST: BULLISH

  • US Dollar retreats alongside Yen, Treasury bonds as risk appetite improves
  • Core geopolitical concerns likely to re-emerge, stocking haven USD demand
  • Added support seen from dovish ECB, fourth month of core inflation gains

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The US Dollar briefly touched a 17-year high early last week but soon found itself on defense as sentiment brightened on global financial markets. Tellingly, the currency slid in tandem with similarly anti-risk Japanese Yen and US Treasury bonds.

Easing geopolitical stress in the UK, Italy and Hong Kong delivered a dose of optimism. That was followed by news that negotiators from Washington and Beijing came to an agreement allowing direct US-China trade talks to resume in October. The data docket delivered nothing especially shocking.

DOLLAR AIMS HIGHER ON HAVEN DEMAND, DOVISH ECB AND UPBEAT US CPI DATA

Looking ahead, the likelihood that such rosy conditions persist seems exceedingly low. Brexit remains at best confounding as PM Boris Johnson clashes with Parliament. He seems to have lost the battle to allow for a “no-deal” split last week, but the larger war may only be just beginning.

Similar skepticism is probably warranted on the US-China trade deal front. Multiple rounds of direct talks have now come and gone, with each one ending in steeper tariffs and louder acrimony. Policymakers have a very long way to go to prove to markets that this time will be different.

That suggests that recent US Dollar losses are corrective within the context of a broader uptrend as jittery market conditions put a premium on liquidity. Additional support may come from the economic calendar, where the ECB monetary policy announcement and US CPI data are in focus.

Central bank President Mario Draghi and company have strenuously signaled that stimulus expansion is due to be hammered out and unveiled this month. A generous dose of easing may drive EUR/USD lower and transmit Dollar strength more broadly.

Meanwhile, US core inflation is expected to accelerate for the fourth consecutive month, hitting the highest level since July 2018 at 2.3 percent on-year. That might cool Fed rate cut speculation ahead of this month’s FOMC meeting, giving the Greenback another nudge upward.

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

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

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