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Jane Foley, senior FX strategist at Rabobank, suggests that the market will be hanging on every word of Fed Chair Powell’s testimony to Congress today and his tone will be key in driving market sentiment and providing clues as to the direction of the USD going forward.

Key Quotes

“On a 5 day view, the USD is the best performing G10 currency having lurched higher on the back of the US Labour data on Friday. That said, the payrolls number was not the only factor driving the USD’s better tone in recent sessions.”

“The DXY dollar index has been gaining ground since late June as the greenback bounced back from a sell-off in the middle of last month.     Although the likely direction of Fed policy will clearly be a key driver of the outlook for the USD in the months ahead, it should not be viewed in isolation.”

“Despite the more dovish outlook of the Federal Reserve, the USD is one of the best performing G10 currencies this year.   This is partly due to other central banks also adopting more dovish policies in response to the global slowdown (we expect the ECB to cut rates at the September meeting).   It is also likely a function of underlying demand for the greenback which stems from its dominance in the international payments systems and the tendency for the USD to benefit as money shifts out of emerging markets and vice-versa.”

“The longer-term outlook for EM is set to play a key part in the outlook for the USD. In our view there is risk of an escalation in the trade tensions between the US and China.”

“While the expectation of cheap money from the Fed and other central banks can provide reassurance to investors short-term, over the longer term we expect EM to be broadly under pressure and for the USD to find some support as a result.”

“We see risk for EUR/USD to dip lower on a 1 to 3 month horizon. This view, however, assumes the Fed will not have many further dovish surprises for the market in this time frame and that the ECB maintains its accommodative policy stance.   We do expect the USD to come under more pressure vs. the EUR in 2020 on anticipation that the Fed steps up the pace of its easing cycle.   We forecast EUR/USD around the 1.15 area on a 12 month view.”