What awaits the USD?

What awaits the USD?

These days everyone is racking brains trying to foresee the future path of the US dollar. This isn’t an easy task. Unlike last year, when the Federal Reserve raised interest rates 4 times and the greenback outperformed, this year the Fed is expected to cut the federal funds rate. However, analysts are far from consensus about how big these cuts may be. As a result, forecasting gets harder than ever. In this article, we have gathered the main things you need to know about the US central bank and the USD. 

The United States vs. China

The fear regarding the US-Sino trade war has diminished after the Presidents Trump and Xi Jinping met at G20 summit last weekend and made a truce. While the immediate threat of more tariffs from both sides has gone away, the fundamental issues remain unresolved. 

On the one hand, the existing risks support demand for the USD as a safe haven. On the other hand, they increase the odds of rate cuts in the United States and limit the strength of the American currency. Ultimately, the influence trade risks and fears have on the USD will depend on the US economic data: good figures will make the greenback strengthen even during the periods of risk aversion, while soft releases will make it underperform.

Donald Trump wants a weaker USD

The US President argues that interest rates in America should be lower. During the past week, he accused Europe and China of currency manipulations saying that their central banks depreciate national currencies and that the United States should do the same. 

If the USD goes up fast and by much, we’ll expect other verbal and even actual interventions from the White House. The purpose of the weaker dollar for Trump is to get more money from American exports. 

The impact of the jobs report

According to the Nonfarm Payrolls figures released on Friday, the US economy added 224K jobs in June. That’s much more than the expected number of 162K and the gain of 72K seen in May. The release made the USD strengthen versus other major currencies as investors’ fear of the upcoming recession eased. 

At the same time, we can’t ignore the fact that wage growth missed estimates (0.2% vs. 0.3%) and the unemployment rate rose from 3.6% to 3.7%. As a result, to support the future job creation and prolong the positive economic cycle, the Fed will likely still need to reduce rate. 

Still, while earlier the market was talking about the possibility of the 50-bps cut on July 31, now the common opinion is that the Fed will reduce its rate only by 25 basis points. The picture below shows that futures on the federal funds rate now price in a 95.1% chance that the rate will be reduced from the current range of 2.25-2.5% to 2.00-2.25% at the end of this month. 

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Events to watch  

July 9, 11 - Speeches of Fed Chair Powell 

July 10 - FOMC Meeting Minutes

July 11 - US CPI

July 12 - US PPI

July 16 - US Retail Sales

July 25 - US Durable Goods Orders

July 26 - Advance GDP

July 31 - Fed’s Meeting

Conclusion

As you can see, every week will bring some key news for the USD. All in all, the fact that the market is ready for a rate cut limits the further downside for the USD. The currency has all chances to remain strong versus the EUR and the GBP. At the same time, the position of Donald Trump will likely prevent the greenback from significant appreciation either. Bear this in mind when you make your trade decisions!

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