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US Dollar Forecast: Fed Says No to NIRP, China Tension Flares

US Dollar Forecast: Fed Says No to NIRP, China Tension Flares

2020-05-16 04:00:00
Rich Dvorak, Analyst
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US DOLLAR PRICE OUTLOOK TURNS SANGUINE AS FED POWELL SPEECH DOWNPLAYS NEGATIVE INTEREST RATES; CORONAVIRUS & CHINA TRADE WAR RISK TO FUEL FX VOLATILITY

  • US Dollar strength last week drove the DXY Index higher by 1.25% toward the 100.50 price
  • USD prices climbed on the back of FOMC remarks pushing back on negative interest rate policy
  • The US Dollar could extend its advance as trade tension with China fuels FX volatility

US Dollar outlook appears increasingly positive in consideration of fundamental developments that occurred over the last few trading sessions. USD price action edged higher post-Powell after the Federal Reserve Chair reiterated the central bank’s stance against using negative interest rate policy, or NIRP.

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Along with several other Federal Reserve officials, Fed Chair Powell spoke out against the idea of adopting negative interest rates in the United States as a channel of monetary stimulus. In response to recent Fed rhetoric, the US Dollar churned higher considering forward rate guidance from Powell was relatively less dovish than hoped by market participants.

DXY INDEX – US DOLLAR PRICE CHART: DAILY TIME FRAME (26 FEBRUARY TO 15 MAY 2020)

dxy index price chart us dollar forecast

Chart created by @RichDvorakFX with TradingView

Owing to the latest stretch of broad-based strength in the US Dollar against other major currencies, the DXY Index jumped back above the psychologically significant 100.00 price level, and reclaimed its 50-day moving average as well. That said, there could be potential for the US Dollar to continue its climb.

With the US Dollar on the rise with FX volatility, the apparent return of risk-aversion and deteriorating market sentiment might propel the DXY Index even higher if demand for safe-haven currencies like the USD is sustained.

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Another imperative fundamental catalyst weighing on the direction of the US Dollar includes rekindled tension and trade uncertainty between the US and China. The major risk posed by US-China trade wars 2.0 could provide a positive tailwind to the broader US Dollar. This is considering US-China trade tension might weigh materially on trader risk appetite and fuel market volatility.

Keep Reading – Stock Market Forecast: Should I Sell in May and Go Away?

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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