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US Dollar Outlook Bearish on Economic Stabilization, Soft Haven Demand

US Dollar Outlook Bearish on Economic Stabilization, Soft Haven Demand

Dimitri Zabelin, Analyst
USD Price Chart

Source: IG Charts

US Dollar Fundamental Outlook: Bearish

  • US Dollar outlook bearish as economic stabilization pressures havens
  • Improving statistics, earnings reports could magnify US Dollar losses
  • Geopolitical risks unable to sour sentiment. Greenback paying the price

Coronavirus Update: Rising Virus Cases Aren’t Bothering Traders

The US Dollar may fall in the week ahead on fizzling demand for haven-linked assets despite a rising number

of coronavirus cases worldwide. The world’s largest economy still tops the list for countries with the highest

number of infections at over 3.5 million. There have been numerous flareups in Texas and Florida where daily

reports have shown alarming trends in both the rate of infections and number of deaths.

Coronavirus Cases Globally

Johns Hopkins Virus Map

Source: Johns Hopkins

However, these virus-related trends have failed to meaningfully dent sentiment, and has consequently left the

US Dollar out in the cold along with its anti-risk peers like the Japanese Yen and Swiss Franc. Equity markets

have continued rallying, particularly technology stocks as central banks continue to pledge to provide as much liquidity as is needed and with the widest range of tools within their disposal.

Broad hope of a vaccine has done its part in buoying sentiment while also pressuring the US Dollar. This includes news about the effective use of Gilead Sciences Inc’s (GILD) antiviral drug Remdesvir along with Pfizer and BioNTech reviewing “fast track” status from the FDA for two vaccine candidates. Progress there could amplify USD’s losses if it inspires a bullish outlook for cycle-sensitive assets like stocks.

Markets Shrugging at Geopolitical Strains, Dollar Paying the Price

Surprisingly, despite a resurgence in US-China political friction over Hong Kong and cross-Pacific trade tensions, markets appear to have shrugged off these concerns. This underscores the central idea that coronavirus-related news – particularly medical metrics and the implied fiscal and monetary policies that follow – will be the dominant force driving sentiment.

Consequently, unless a geopolitical development of significant magnitude shakes up markets in an already fundamentally-unstable environment, the US Dollar may not get a tailwind from escalated tensions. To learn more market-moving international affairs, be sure to follow me on Twitter @ZabelinDimitri.

US Economic Indicators to Monitor

The US Dollar’s losses may be further amplified if flash manufacturing, services and composite PMI data for June show that economic activity is picking back up. Economists estimate a 52.0 and 51.0 print for manufacturing and services, respectively. The crossing of the 50.0 threshold – a reading below it indicates contraction and above it expansion – could fortify optimism on the basis of an improving fundamental outlook.

Other notable indicators to monitor throughout the week include initial and continuing jobless claims data and new home sales for June. The latter may be particularly important to monitor because of what those figures mean for consumer confidence. In a consumer-driven economy, gauging the behavioral disposition of its driving engine can be helpful in forecasting potential future spending confidence.

Earnings Data May Rattle Markets and Push USD Higher

The US Dollar will also be closely watching the release of an avalanche of large market-cap companies. These include American Express, IBM, Verizon, Tesla, Coca-Cola, AT&T, Capital One and more. Last week, JPMorgan reported record-breaking trading revenue, though many investment banks are reportedly increasing their capital stock in anticipation of higher rate of defaults across a swath of loans.

Consequently, a weaker-than-expected earnings cascade from these firms could be a tailwind for the US Dollar and help it recover losses it might have incurred throughout the week. Financial instability could magnify USD gains as highly-leveraged companies continue to face downgrades despite signs of economic stabilization.

--- Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

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

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