Key Charts to Watch: Default Buying in USD
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USD Analysis and Talking Points
- USD Remains King, Despite Dovish Fed
- US Economy Performing Better than Counterparts
- Rate Differentials Stay in Favour of USD Support
- Central Banks Join Fed in Cautious Stance
DailyFX Q1 2019 Trading Forecasts for USD
USD Remains King, Despite Dovish Fed
Following its largest winning streak in over 2yrs the USD continues to remain king. After hitting fresh YTD highs, focus is now on 97.70 (2018 highs). While this may have been somewhat surprising, given that the Fed had confirmed a U-Turn in their monetary policy stance at the January meeting. Risks outside of the US continue to keep the Dollar on the front foot by default.
When we look outside of the US, it is clear to see that uncertainty is abundant. UK data continues to deteriorate in the face of Brexit. Q4 GDP figures from the UK showed that the economy grew at the slowest pace since 2012, while business investment dropped for a 4th consecutive quarter for the first time since the financial crisis. Elsewhere, Eurozone data continues to go from bad to worse, which continues to show a slowing momentum in the growth dynamics with Italy hitting a technical recession and Germany narrowly avoiding one. The chart below shows us that US data continues to outperform relative to the Eurozone and UK, which in turn has helped keep the USD supported.
Source: Refinitiv. Citi Surprise Index for US, Eurozone and UK.
As the economic outlook remains unquestionably strong for the US relative to the rest of the world. There has been a breakdown in various correlations, among which have been the waning effect of interest rate differentials. While these continue to remain in the US Dollars favour, yield differentials have tightened quite noticeably in recent months from the peaks seen in Q4 2018. Possibility for a convergence, which may move against the further USD upside.
Source: Refinitiv. US-German 2yr Bond Spread, DXY Index.
Since the Federal Reserves U-Turn amid the concerns regarding slowing global growth, other central banks have also joined the cautious stance, with the RBA recently removing their tightening bias to a more balanced outlook. As such, this has eased the negative USD effects, which would typically take place from a dovish Fed.
Central Bank Near Term Outlook
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--- Written by Justin McQueen, Market Analyst
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