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US Dollar Eyes Coronavirus Impact on S&P 500 Earnings Season

US Dollar Eyes Coronavirus Impact on S&P 500 Earnings Season

Rich Dvorak, Analyst

US DOLLAR FORECAST: US DOLLAR TO RISE IF S&P 500 EARNINGS DUE THIS WEEK REKINDLE SAFE-HAVEN DEMAND AS ECONOMIC COST OF COVID-19 MOUNTS

  • US Dollar edges lower to start the trading week but the DXY Index is flat on balance due to a notable decline in EUR/USD price action
  • The US Dollar is still 3% higher year-to-date after the COVID-19 pandemic sparked a wave of investor risk aversion and move into safe-haven assets
  • USD may come back into demand if S&P 500 earnings season fuels another liquidity crunch

The US Dollar continues to give back recent gains. US Dollar selling pressure against key peers, like the Pound, Yen, Australian Dollar and Canadian Dollar, has persisted over the last couple of weeks as market sentiment recovers with a rebound in the S&P 500.

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The DXY Index, a popular benchmark of major currency pairs that reflects broader US Dollar performance, is little changed on the day, however, owing to a decline in EUR/USD. Perhaps driven by a bearish note from the ECB detailing how the Euro-area likely faces a deeper recession due to COVID-19 than the rest of the world, spot EUR/USD is lower by about 19-pips as the US trading session comes to a close.

US DOLLAR – DXY INDEX PRICE CHART: DAILY TIME FRAME (31 DECEMBER 2019 TO 13 APRIL 2020)

DXY Index Price Chart US Dollar Fundamental Forecast

Chart created by @RichDvorakFX with TradingView

After surging more than 6.5% to start the year, which came in response to a massive liquidity crunch spurred by coronavirus recession risk, the DXY Index has since pulled back to trade nearly 2.7% higher on net. As the US Dollar drops with FX volatility, likely a reaction to unprecedented amounts of monetary and fiscal stimulus aimed to offset economic fallout from COVID-19, will the US Dollar extend its retracement lower? Or is there potential for USD price action to snap back to recent highs?

US DOLLAR – DXY INDEX PRICE CHART: DAILY TIME FRAME (26 SEPTEMBER 2019 TO 13 APRIL 2020)

US Dollar Price Chart DXY Index Technical Analysis

Chart created by @RichDvorakFX with TradingView

From a technical perspective, the US Dollar Index is currently probing confluent resistance-turned-support around the October 2019 and mid-February swing highs near the 99.50 price level. A positively sloped trendline connecting the series of higher lows recorded on March 13, 16, 27 and 30 might provide a degree of buoyancy to USD price action.

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Holding this area could open up the door to test month-to-date highs. On the other hand, the 61.8% and 78.6% Fibonacci retracement levels of the March 09 to March 20 leg higher may come into focus if there is a breakdown below this zone that leads to another big push by US Dollar bears.

US DOLLAR EYES S&P 500 AS INVESTORS DIGEST CORONAVIRUS-BATTERED STOCK MARKET EARNINGS

Chart of S&P 500 Index Earnings Estimates 1Q-2020 Coronavirus Impact

Chart of S&P 500 Index Price Change vs 1Q-2020 Earnings (Source: FactSet)

That said, the direction of the US Dollar might respond less to technicals as investors and forex traders start to scrutinize a primary driver of market fundamentals: stock market earnings. S&P 500 earnings season for 1Q-2020 is set to swing into full gear this week with large US banks – like JPMorgan Chase, Wells Fargo, Bank of America and Goldman Sacks – set to release quarterly performance reports.

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The S&P 500 Index has spiked more than 25% off its March 23 trough as the groundswell of liquidity from global central banks and governments fuels stock market complacency. Considering the economic impact of COVID-19 likely outweighs recent stimulus efforts, however, stocks appear at risk of crashing back toward year-to-date lows.

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On that note, overly-optimistic earnings estimates, and current expectations for a ‘V-shape’ recovery in the economy, might receive a harsh reality check over the next several trading sessions as S&P 500 earnings cross the wires. This, as well as US retail sales and initial jobless claims data expected this week, may catalyze another major selloff in stocks which, in turn, could correspond with a cash crunch that propels the US Dollar back to recent highs.

Read More: Top 3 Things to Know When Trading Earnings

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

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

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

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