US Dollar Forecast: Major events moving currencies

Browsing: US Dollar Forecast

By Yohay Elam on Jun 15, 2019

The relief in trade wars seems insufficient to boost markets, which are still worried about another flare-up. After all the critical US data, is out, it is time for the Fed to lay out its plans regarding a rate cut. And also watch out for central banks in Japan and in the UK. The upcoming. Here the highlights for the next week.

The US dollar emerged as the winner in a busy week that saw intensifying trade tensions and also mixed US data. Retail sales beat expectations while inflation missed projections. Boris Johnson is emerging as the next UK PM after the first round of votes. Oil rose and fell after oil tankers were attacked at the Gulf of Oman.

UK inflation: Wednesday, 8:30. The Bank of England may be content that the annual level of consumer price index has hit 2.1% – almost at the BOE’s 2% target. Core CPI stood at 1.8% while retail prices were somewhat higher at 3%. The fresh figures for May will likely show a slide in headline CPI due to falling energy prices, but core CPI may refrain from substantial movements.
Fed decision: Wednesday, 18:00, press conference 18:30. The Fed has removed any intention to raise interest rates in 2019 – and may now signal rate cuts. Markets are already pricing in two cuts this year with the first one coming in the July meeting that follows this one. Fed Chair Jerome Powell has already moved from dismissing low inflation in the first quarter as “transitory” and stressing “patience” means no hikes nor cuts – to ditching the patient stance and saying he we will “act as appropriate.” The US economy is doing well, but the recent disappointing US jobs report which missed on both job gains and wages may cause a rethink at the central bank. Moreover, the previous rate decision came just days before US-Sino talks broke down. The Fed may be unable to ignore politics and may have to incorporate headwinds to global trade in its outlook.
But how far will it go? The first thing markets will be watching is the dot-plot. The Fed releases projections for inflation, growth, employment, and most importantly – interest rates – once a quarter. As mentioning earlier, markets are expecting two rate cuts this year. If the Fed continues signaling no cuts or only one, the greenback may storm higher and stocks could plunge. Indicating two cuts may weigh on the USD and going as aggressive as three – highly unlikely – would send the greenback plunging.
If the shift in the dots is extreme, nothing else matters. However, if the Fed signals one or two cuts, the focus will quickly shift to the statement. How worried is the Fed about inflation? Will they incorporate fears about trade in the statement? Were there any dissenters that wanted a rate cut now? All these factors may have a substantial impact.
Last but not least, Chair Powell speaks half an hour after the news is out. Several months ago, he said that the economy is doing very well. How will he characterize the situation now? Comments about the next moves in interest rates will likely have the most significant impact, followed by comments about inflation and trade. His presser will be scrutinized for every word and the echoes from the decision will likely be heard for days.
New Zealand GDP: Wednesday, 22:45. The economy of the small island nation has enjoyed a robust growth rate of 0.6% in the last quarter of 2018, and 2019 has probably begun on a softer note. The impact of the trade wars and lower business confidence may have hurt New Zealand, which publishes GDP data only once – without revisions.
Japanese rate decision: Thursday, early morning. The Bank of Japan already enacts the loosest monetary policy in the developed world by committing to keep the 10-year yields depressed and with a negative interest rate. Nevertheless, the BOJ is far from its 2% inflation target. Will Governor Haruhiko Kuroda and his colleagues offer something new? They may extend their pledge for low rates, but that will not convince markets.
UK retail sales: Thursday, 8:30. Just before the rate decision, retail sales data for May are projected to fall by 0.5% after remaining flat in April. The UK economy has suffered in April after a surge in March – all related to stockpiling ahead of Brexit – which has not happened. It is important to note that fluctuations are common in this figure.
BOE decision: Thursday, 11:00. The Bank of England has expressed its intention to raise interest rates to stay ahead of the curve on inflation and to have a buffer in case of a recession. However, high uncertainty regarding Brexit has paralyzed any policymaking. Does the BOE still project a smooth Brexit? Do they still intend to raise interest rates or will they follow their colleagues in ditching the idea?
Euro-zone PMIs: Friday, 7:15 for France, 7:30 for Germany, and 8:00 for the euro-zone. Markit’s forward-looking indicators have shown uncertainty about future growth. The most worrying figure has been the German manufacturing purchasing managers’ indicator which has been well below 50 – the threshold that separates expansion from contraction – for several months. It is now forecast to rise from 44.3 to 44.6 points. France’s figures have been marginally above 50 and are expected to hold their ground in the preliminary figures for June.

*All times are GMT

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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.