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What lies ahead for the USD?
Information is not investment advice
The USD has been steady versus a basket of major currencies since the start of 2019. The dollar index is trading close to September highs, which, in turn, are at the maximum levels since 2017. The current week, however, hasn’t been very positive for the American currency. So, what future awaits it? In this article, you will find the fundamental outlook for the greenback.
US economy has faltered
Life shows that it’s not possible to fight in trade wars and stay unharmed. The data released on Tuesday showed that the US manufacturing sector is in its worst condition in a decade: ISM Manufacturing PMI dropped from 49.1 to 47.8 in September. A reading below 50 indicates industry contraction. Given how low the latest number is, it’s certain that even if the underlying picture changes and positive factors come into play, the situation won’t be able to improve fast.
And so far, there are few reasons to believe that the United States and China will achieve a big breakthrough in their negotiations. Representatives of the nations will meet next week on October 10 and 11. Although soothing comments may cheer the stock market, it will take the mutual renunciation of tariffs to amend the damage done to the economy. If talks fail, there will be more tariff hikes in the following months and hence an even stronger economic pain. Moreover, recent rumors indicate that Donald Trump is considering limiting American investment flows to China. This step, if taken, would further escalate the trade conflict.
Remember that everything is interdependent in the economic world. Considering the external troubles, it’s now up to US consumers to drive economic growth. For them to be able to do that, they need ample wages. This week, investors pay close attention to the American labor market. A private report has shown that the pace of hiring is slowing down. We’ll see whether the official indicator of Nonfarm Payrolls (NFP), due on Friday, confirms this observation. In addition, we will watch the Average Earnings Index to understand whether wage growth has accelerated or not.
Impact on the USD
The market expects the Federal Reserve to keep cutting interest rates. Expectations for a rate cut by the end of October jumped from 40% to 74% after the ISM report. As for the next key meeting of the Fed in December, traders have almost no doubts that there will be a rate cut.
Rate cuts are negative for the USD. The US central bank has already lowered rates twice this year. Despite this fact, the greenback remains stable enough. This is so because American rates are still at least twice as high as those of other major central banks. In other words, while the Fed is easing policy, other central banks ease policy more, so their currencies still lose to the USD, even though the USD has little strength of its own.
Notice that the importance of the upcoming US economic releases has just gone several notches up. If American economic figures keep disappointing, the USD index will have every chance to slip towards September lows and then potentially to August lows. The US dollar will be the most vulnerable versus the safe-haven JPY and CHF. The greenback can also appreciate relative to the GBP which has Brexit deadline in front of it. At the same time, currencies like the AUD and the NZD have little chance to strengthen substantially against the USD as long as the global trade conflict is unresolved.
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