US Dollar Forecast: Covid Cases, Retail Sales May Keep DXY, Yen and Franc Afloat

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US Dollar Fundamental Forecast – Neutral

• The US Dollar (DXY Index) remains near yearly lows under the 93 handle
• Record Covid cases across U.S. see safe-haven bids on the Yen and Franc
• Lack of high-impact economic data next week leaves Covid fears in the spotlight

The US Dollar Index (DXY) inched higher this past week as the haven-linked Swiss Franc, and Japanese Yen sank on positive vaccine news from Pfizer. The positive results from Pfizer’s phase-3 trial spurred sentiment across markets. Meanwhile, the removal of political risks via the U.S. 2020 election saw an unwinding of pre-election trades.

US Dollar Chart 30-Min

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With the election in the rearview mirror, investors appear to be shifting their focus back to the Covid pandemic. The United States remains a hotspot and is at record-breaking levels in daily case counts and hospitalizations. A vaccine approval appears very likely before the end of the year according to public health officials. However, they also mentioned that scaling access through production and distribution will likely take months.

President Trump has vowed for no more lockdowns going forward. This is as several states have begun imposing more stringent social distancing measures nonetheless. Illinois, one of the largest economies in the U.S., is on the verge of another lockdown, according to state officials. In New York State, Governor Andrew Cuomo has ordered a curfew on dining establishments, and New York City may shutter schools this Monday, per officials.

U.S. Covid Statistics

Source: The Covid Tracking Project

Another wave that many have long feared now appears to be underway. This poses the question of how severe the economic fallout could be. Lockdowns and other state-imposed restrictions undoubtedly hurt economic activity. Prospects for a “V-shaped” recovery now appear to be fading, but the economy has shown resilience during the pandemic, evidenced by a robust services sector.

US Dollar vs ISM Services PMI

Still, investors and traders will likely continue to keep a close eye on Covid and vaccine headlines. Until the virus is contained or appears to be well controlled, the US Dollar could benefit from aggressive risk aversion. Safe-haven bids across the Japanese Yen and Swiss Franc are also likely to be underpinned on those same woes.

A less dovish Bank of Mexico and Reserve Bank of New Zealand will also pressure US Dollar strength. Banxico kept its overnight rate unchanged this week in a largely unexpected decision. Furthermore, the RBNZ hedged expectations for another rate cut next year.

DailyFX Economic Calendar – U.S. High-Impact Events

Source: DailyFX Economic Calendar

In the upcoming week, only one high-impact U.S. event is on tap. According to the DailyFX Economic Calenda r, retail sales will cross the wires Tuesday morning. Economists’ expectations see the figure rising 0.5% on a month-over-month basis. Hence, the US Dollar appears to be set for further sideways movement in the short term, and will likely stay near the 93 handle.

Written by Thomas Westwater, Analyst for DailyFX.com

Contact Thomas at @FxWestwater