US Dollar Biased Higher as Haven Flows Trump Fed Rate Cut Bets

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US DOLLAR FUNDAMENTAL FORECAST: BULLISH

  • US Dollar torn between haven demand, Fed price cuts in risk-off commerce
  • Likely extent of Fed easing already priced in at the same time as sentiment sours
  • Path of least resistance doubtless favors upside on back-to-back occasion danger

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The US Dollar continued to battle for a clear-cut lead final week. Moves to escalate the US commerce warfare with China in addition to open new fronts with the EU and Mexico have roiled markets already bedeviled by slowing international progress and a plethora of political uncertainties. The destiny of Brexit alone is a tectonic danger. That stoked haven USD demand at the same time as Fed price reduce expectations firmed, making for conflicting cues.

The severity of danger aversion appears decisive. Last week’s forecast argued that the Dollar “derives its anti-risk attraction from unequalled liquidity. Put merely, the stronger the risk-off push – implying a better premium on money amid liquidation – the likelier USD is to profit.” This doubtless stays in play. If buyers prioritize security over returns in earnest, a dovish Fed will fade in significance as a headwind for the Greenback.

US DOLLAR BIASED HIGHER AS HAVEN FLOWS TRUMP FED RATE CUT BETS

Next week’s information docket gives loads of alternatives to check these dynamics. In the US, international progress and Fed coverage bets will collide once more as ISM manufacturing and service-sector surveys lead into May’s jobs report. An RBA price resolution in addition to Australian GDP and Chinese PMI information will provide a view on commerce warfare harm in the intervening time. More hand-wringing from the ECB can also be on the menu.

As it stands, the markets are all however sure of 1 price reduce arriving sooner or later in fourth quarter and permit for the very slight likelihood of a second. Coupled with the Fed’s already deliberate transfer to cease steadiness sheet normalization, two cuts would quantity to a number of easing in a rush. At that time, situations would have most likely deteriorated sufficient to insulate USD as panic promoting drives haven flows.

Absent such pandemonium, the extent of what the Fed will provide in help this yr seems to be all however totally priced in. That suggestions the scales in favor of anti-risk shopping for because the dominant Dollar driver going ahead. Negative information outturns would possibly muddy the waters briefly, however the total panorama nonetheless argues for the upside as the trail of least resistance.

— Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the feedback part beneath or @IlyaSpivakon Twitter

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