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US Dollar Ticks Higher on Downgraded IMF Global Growth Forecast

US Dollar Ticks Higher on Downgraded IMF Global Growth Forecast

Thomas Westwater, Contributor

IMF GDP Forecast, US Dollar, COVID-19, Recession – Talking Points:

  • IMF lowers global economic output forecast to -4.9% for 2020
  • Recovery remains highly uncertain as COVID-19 spread continues
  • US Dollar pushes higher as risk appetite pulls back

The International Monetary Fund updated its World Economic Outlook Growth Projections Wednesday morning, revealing a downgraded forecast for the world economy than previously projected. Global output is now forecasted to drop by 4.9% this year, down 1.9% from the previous April IMF forecast. The recovery forecasted for next year also took a hit, now at 5.4%, down from 5.8%. This amounts to a cumulative output loss of 12.5 trillion USD throughout 2020 and 2021 according to the IMF report.

IMF World Economic Outlook Projections:

IMF June outlook GDP

Source: IMF World Economic Outlook Update, June 2020

US Dollar price action ticked higher following the report’s release, bolstered by the overall risk aversion rippling throughout markets Wednesday. While the downgraded IMF forecast is likely responsible for a portion of the risk aversion seen currently, increasing COVID-19 infections, particularly in certain areas of the United States, is worrying market participants on second-wave fears. For instance, Florida recorded a record-breaking 5,500 confirmed new infections for Tuesday. The rise in cases is a testament to the COVID-19 pandemic being far from over.

US Dollar (15-Min Chart)

US Dollar Chart

Source: IG Charts

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Furthermore, US equity markets are deep in the red today following the downgraded IMF forecast and troubling rise in infections seen across several US states. Both the Dow Jones Index and S&P 500 index are trading over 2.5% lower in the Wednesday afternoon trading session. This price behavior between the US Dollar and equities further highlights the recent cross-asset correlation seen across the FX and equities space.

US Dollar Index versus S&P 500 Index (Daily Chart)

US Dollar versus S&P 500

Chart created in TradingView by Thomas Westwater

While the US Dollar remains well off its multi-year high from March, a significant and prolonged bout of risk aversion would likely push USD price action back near that level as investors flee for safe-haven assets. The recent strength in equity markets being driven on hopes for a ‘V-shaped’ recovery, along with unprecedented monetary and fiscal support may take a hit going forward should the IMF projections for a more sluggish economic rebound become more apparent to market participants. For now, virus infection rates, economic data, and efforts for further monetary and fiscal stimulus will remain forefront to investors as market conditions are continually reassessed.

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

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