Fundamental Forecast for the US Dollar: Neutral
– The US Dollar will deal with several important data releases over the coming week, including UK GDP, the ECB meeting, US inflation data, and the Fed meeting minutes.
– The IG Client Sentiment Indexshows that retail traders continue to sell the US Dollar during its rise.
US Dollar Rates Week in Review
After a strong end to March, the US Dollar continued its bullish run into April and Q2’19. Gaining ground against all but two of the major currencies, the DXY Index added another 0.16% this past week. The only two holdouts were AUDUSD (0.13%) and GBPUSD (0.02%).
EURUSD barely moved on the week (-0.02%). NZDUSD was the biggest loser on the week (-1.09%), while USDJPY’s gains (0.78%) largely mirrored the rise in the US Treasury 10-year yield as well as continued progression higher by US equity markets. The March US Nonfarm Payrolls report on Friday helped buoy the greenback, serving as another piece of evidence that the economy didn’t keel over in Q1’19.
March US Inflation Due Wednesday; Inflation Expectations Continue to Fall
The March US Consumer Price Index reporton Wednesday is due to show a rebound in price pressures, in line with the continued rebound in energy prices as well as the improved streak of US economic data. According to Bloomberg News, headline CPI is expected in at +1.8% from +1.5%, and Core CPI is due in to hold at 2.1% (y/y). Overall, the readings are due short the Federal Reserve’s medium-term target of +2%.
The rise in energy prices since the end of December have filtered through to US inflation expectations (Crude Oil prices up by +12.5% over the past four-weeks), serving as a contemporaneous confirmation of the rise in Q1’19 US growth expectations in recent weeks (particularly since the March Fed meeting). These observations suggest that headline CPI figures should remain supported in the near-term.
March Fed Meeting Minutes on Wednesday
Speaking of the March Fed meeting, the minutes from said meeting are due out on Wednesday as well. While neither on its own would have been too significant, both the decision toeliminate the potential of a 25-bps rate hike this year and to end the balance sheet reduction process served to catch traders off-guard.This considerably dovish shift in tone and policy will be explored in greater detail this week; given the volatility and US Dollar weakness that initially emerged around the actual March Fed meeting, it would not be a surprise if similar reactions emerged, if only temporarily, when the minutes are released.
US President Trump Tweets About the Fed
A new issue for the US Dollar may be US President Donald Trump’s more aggressive foray into challenging the Federal Reserve’s independence. Despite publicly chastising the Fed’s low interest rate policy and its QE programs as far back as 2011, a different tone emerged this Friday when President Trump said that “the Fed should drop rates,” and that “in terms of quantitative tightening, it should actually now be quantitative easing.”
US-China Trade War Talks Update
American and Chinese negotiators have been meeting in Washington, D.C. to pave the path for a bilateral summit between US President Trump and Chinese President Xi Jingping by the end of May. Even so, three key issues remain:forced intellectual property transfers from foreign companies to the Chinese government remains an issue for the Americans; the heavy-handed tariffs levied by the Trump administration on the Chinese; and the viability of an enforcement mechanism.
External Forces to Hold Sway: April ECB Meeting; Brexit Latest
Beyond the busy week on deck for the US Dollar, there are plenty of exogenous forces in play that will influence price action across USD-pairs. On the economic calendar, nothing will garner more attention this week than the April ECB meeting. In the wake of the March meeting where the third TLTRO program was announced, the prospects of a deposit rate hike in 2019 have evaporated. We’ll be looking for more information on recent discussions from ECB officials about the impact of negative interest rates on the banking sector.
Elsewhere, a great deal of attention will remain on the latest Brexit developments as the April 12 deadline inches closer. As UK Prime Minister and Tory party leader Theresa May meets with Labour party leader Jeremy Corbyn, reports have been pessimistic about a “national unity” agreement emerging from UK parliament. Another extension is possible, but that would require the UK to participate in EU parliamentary elections. If a Brexit is secured, so long as it is not a no deal, “hard Brexit,” then GBPUSD strength may spillover and weigh down the DXY Index overall.
US Dollar Futures Positioning Holding Net-Long
Finally, looking at positioning, according to the CFTC’s COT for the week ended April 2, speculators increased their net-long US Dollar positions to 28.9K contracts, up from the 25.3K net-long contracts held in the week prior. Net-long US Dollar positioning has oscillated since the start of the year, but there haven’t been any significant changes: traders held 32.4K net-long contracts on January 1.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at [email protected]