US Dollar Forecast: Major events moving currencies

Browsing: US Dollar Forecast

By Yohay Elam on Sep 19, 2018

Currencies rocked and rolled on some calm on the trade front, Brexit optimism, and top-tier economic data from the US. The focus shifts away from the US amid an eclectic mix of figures from various places in the world. Here are the highlights for the next week.

The US and China are talking once again. The initiative comes from US Treasury Secretary Mnuchin, and it is unclear if he has the support of Trump. US inflation missed expectations but retail sales were OK thanks to upward revisions. The Fed remains optimistic about the economy and consumption. Chief EU Negotiator Michel Barnier said that reaching a Brexit deal is realistic within 6-8 weeks, sending the pound also the euro higher. ECB President Mario Draghi was relatively upbeat as he left inflation forecasts unchanged, supporting the euro. Turkey’s central bank finally raised rates, calming the situation. What’s next?

Updates:

Japanese rate decision: Wednesday morning. The Bank of Japan has the loosest monetary policy in the developed world and for good reasons. Core inflation remains depressed, far from the Bank of Japan’s 2% target. The BOJ recently made some tweaks to its bond-buying scheme, opening up a broader range of buys. The Tokyo-based institution is unlikely to change course anytime soon. Governor Haruhiko Kuroda will provide updates in his press conference. An upbeat comment on the recent upgrade in GDP could push the yen a bit higher.
UK inflation: Tuesday, 8:30. The Bank of England raised rates in August after inflation had picked up. However, prices are not going anywhere fast. Headline CPI stood at 2.5% y/y in July and the figure for August is expected to be slightly lower, at 2.4% The recent rise in the pound will only be felt later on in inflation figures. Core CPI stood at 1.9% and 1.8% is expected now The Retail Price Index (RPI) was at .3.2% and the same level is predicted now. PPI Input advanced by 0.5% MoM and an increase of 0.4% is expected.
New Zealand GDP: Wednesday, 22:45. The small nation publishes Gross Domestic Products only once, making a larger splash in every event. The economy grew by an OK quarterly growth rate of 0.5% in Q1 2018. A small pick may be seen now: a robust growth rate of 0.8% is on the cards.
Swiss rate decision: Thursday, 7:30. The Swiss National Bank has kept its policy unchanged since the unforgettable day it removed the peg under EUR/CHF, January 15th, 2015. Since then, it maintains the Libor Rate at -0.75%, deep into negative territory. It also pledged to intervene as needed to weaken the franc. With EUR/CHF recently nearing and touching the 1.20 level, the SNB has not been active in FX for quite some time. They are not expected to change their policy in the upcoming meeting. However, they may begin talking about an exit plan from the negative interest rate, a move that could boost the value of the CHF.
US Existing Home Sales: Thursday, 14:00. Housing was relegated to the backbenches of economic indicators but could make a comeback. Existing Home Sales dropped in the past four months, a phenomenon not seen since 2013. After hitting 5.34 million in July, another drop in August would be worrying. A small increase to 5.39 million is projected.
Canadian inflation: Friday, 12:30. The Bank of Canada intends to raise rates in October, assuming a successful NAFTA deal is struck. But Stephen Poloz and his colleagues will need data to support such a move. Headline inflation rose by 0.5% in July while Core CPI lagged behind with a more modest 0.2%. Significant inflation is needed to justify a move. Retail sales for July are published at the same time. Both headline and core sales dropped in June.

*All times are GMT

Our latest podcast is titled Too hot or too cold? The world is watching the Fed

USD and forex general characteristics

The United States Dollar is the reserve currency of the world, partly due to its use in settling oil prices and other commodities. Foreign exchange pairs are divided into majors, minors, and crosses. Both majors and minors include the USD.

US economic indicators and political developments influence currencies more than anywhere else in the world. The decisions and statements by Federal Reserve officials make the biggest waves. The US economy is by far the largest in the world. US politics and policy also have an outsized impact on currencies.

The outlook consists of mostly US economic events but also key market-moving figures from other major economies. The euro-zone, the UK, and Japan stand out.

Recent USD Moves

The greenback suffered a bad start to the year: poor growth and scandals hurt the US dollar. Hopes for fiscal stimulus faded with the repeated failures to repeal Obamacare. Despite two rate hikes in the first half, the dollar struggled. Other economies outperformed America.

The second half already looks a lot different: economic growth reached 3% annualized and the Fed seems to stick to its plan to hike rates three times. In addition, Trump’s tax plan inspires markets, despite hurdles to pass it before Christmas.

Headwinds come from the political scandals. Low inflation also weighs on the dollar. If the “mystery” persists and wages do not accelerate, Janet Yellen and co. could refrain from further tightening. The new Fed Chair Jerome Powell will take office in February 2018, and he may not stick to the current plan of raising rates three times.