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US Dollar Ripe for Reversal: GDP, Fed, Earnings Raise Volatility Risk

US Dollar Ripe for Reversal: GDP, Fed, Earnings Raise Volatility Risk

2020-07-26 08:00:00
Daniel Dubrovsky, Analyst
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US Dollar Chart

Source: IG Charts

US Dollar Forecast: Neutral

  • US Dollar weakness may cool during a jam-packed week
  • World’s largest economy will likely see technical recession
  • Other risk: FOMC rate decision, earnings season, stimulus

The inverse relationship between the haven-linked US Dollar and the S&P 500 remains strong heading into what is a jam-packed week of event risk. By now, the US Dollar’s persistent losses since equities found a bottom in late March are no secret. With that in mind, can volatility risk bring life back to the Greenback, resulting in a comeback?

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Starting with the economic calendar, the FOMC rate decision is front and center on Wednesday. Here policymakers and Chair Jerome Powell may reiterate the need to keep lending rates at near-zero levels. Traders will likely pay more attention to the central bank’s assessment of growth and compare that to prospects of a V-shaped recovery.

The more interesting event could be the first print of second-quarter GDP the next day. The US, which is the world’s largest economy, is expected to see its GDP shrink about 34 percent q/q versus -5 percent prior. This would fulfil the definition of a technical recession, two consecutive quarters of negative GDP. It would be the first one in almost 13 years.

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On the whole, US economic data has been tending to outperform relative to economists’ expectations consistently since June. But lately, the extent of upside surprises has been fading. Markets are forward-looking, and with the bar being set so high for a swift recovery, it may be that this event passes without much fireworks altogether. This could change with a much worse-than-expected result however.

More timely pieces of information ought to be carefully scrutinized, such as initial jobless claims. Last week’s print was unexpectedly worsethanestimated, causing a turnaround in equities and cushioning the US Dollar. With earnings from closely-watched tech companies, such as Netflix and Microsoft, disappointing, all eyes are on Amazon and Apple ahead. More of the same could reignite strength in the US Dollar.

Meanwhile coronavirus cases continue to climb locally as states like Florida and Texas reported record daily deaths last week. The country now has over 4 million confirmed cases. All eyes thus turn to Congress and the White House for more fiscal stimulus. The extra $600/week unemployment benefit is set to expire at the end of this month. More support could keep the US Dollar under pressure.

US Dollar Versus Risk Trends

US Dollar versus risk trends

Chart Created in TradingView

*Majors-Based US Dollar Index Averages USD Against: EUR, JPY, GBP and AUD

--- Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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

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