US Dollar, FOMC, US GDP –TALKING POINTS
- US Dollar may surge if US GDP data and FOMC commentary paint gloomy picture for growth
- Data out of largest economy has been tending to underperform as manufacturing sector shrinks
- Fed’s message of data-dependence could spook investors and dash hopes for liquidity injections
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The US Dollar may rise against equities and emerging market FX if the FOMC rate decision and press briefing undermine market confidence in the global growth trajectory. This fear may be amplified by the publication of US Q3 GDP data and earnings reports from market giants like Facebook and Apple. All of these elements combined could induce risk aversion and lead traders into the open arms of the highly-liquid US Dollar.
FOMC Rate Decision: US Dollar Outlook
Fed officials are expected to once again cut lending costs for a third time this year as the global economy enters a “synchronized slowdown” in large part due to the US-China trade war. While markets may initially rejoice from the 25-basis point cut, its potency in stimulating volatility and optimism may be limited insofar that markets have already priced it in.
What traders will be anxious to hear will be the subsequent press briefing where officials will illuminate investors as to why the Fed is essentially unwounding most of its tightening from 2018. Fed Chairman Jerome Powell has repeatedly reiterated that monetary authorities are not a pre-set path and will adjust policy in accordance to the prevailing economic conditions. That is, they are data-dependent.
Therefore, even if the Fed delivers the rate cut markets are so yearning for, their outlook on future policy may not meet investors’ ultra-aggressive expectations. The US Dollar may end up rallying if the central bank reinforces its prudent approach to policy and disappoints the market’s lofty expectations for a looser credit paradigm.
US GDP Data
US GDP data on a quarter-on-quarter basis is expected to show an advanced estimate of 1.6 percent, lower than the previous print at 2.0 percent. Apart from the most recent improvement, US data has been broadly underperforming for almost all of 2019 so it would not be surprising to see GDP fall in line with this trend. The US-China trade war has played a significant role in undermining the world’s largest economy’s growth.
Businesses – particularly in manufacturing – have cited the US-Sino conflict has a major cause of uncertainty and has led to managers being reluctant to commit capital and expand their enterprises if the demand will not meet the supply. On Tuesday, US consumer confidence data came in at 125.90, which not only missed the 128.0 estimate but was the softest reading since June 2019.
US Dollar Price Chart
Up until recently, the US Dollar – against a basket of G10 currencies – had been climbing along an 18-month uptrend despite mounting rate cut expectations. However, recently, strength in the Greenback has eroded from a revival in risk appetite against the backdrop of optimism on US-China trade talks. This alleviated the downward pressure on emerging markets and put a discount on haven-linked assets like the US Dollar.
US Dollar Falling as Amid Renewed Risk Appetite as Emerging Market ETF Rises
US Dollar Index chart created using TradingView
However, the FOMC meeting and Q3 GDP data publication could lead to the Greenback reverse some of its losses if traders panic. We have seen a similar phenomenon occur at other FOMC meetings, though the volatility at this meeting may be higher than usual. This in large part has to do with the more fragile state of financial markets as the fundamental base that helped carry the index in 2018 is slowly dissolving.
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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitri on Twitter
