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US Dollar Forecast: Fed, Coronavirus Guidelines & Earnings Eyed

US DOLLAR FORECAST: FED POLICY RESPONSE, TRUMP CORONAVIRUS GUIDELINES, S&P 500 EARNINGS SEASON IN FOCUS

  • The US Dollar edged marginally higher over the last 5 trading sessions judging by the DXY Index as coronavirus optimism waned
  • US Dollar could rally with the Fed set to slow blond purchases or if another wave of investor pessimism is sparked by shockingly poor S&P 500 earnings and economic data
  • USD price action might face headwinds if President Trump’s coronavirus guidelines for opening back up the US economy propels risk appetite

The US Dollar climbed by a quarter of a percent on balance this past week as measured by the DXY Index. Major currency pairs have gyrated recently owing to mixed USD price action and an unclear direction for the broader US Dollar.

This likely stemmed from recent coronavirus updates, such as the pandemic’s horrific impact on economic data and anecdotal evidence that an effective COVID-19 treatment might be near, which have corresponded with violent shifts in trader sentiment and swings in the US Dollar.

DXY – US DOLLAR INDEX PRICE CHART: 1-HOUR TIME FRAME (10 APRIL TO 17 APRIL 2020)

US Dollar Forecast DXY Index Price Chart

Chart created by @RichDvorakFX with TradingView

Looking ahead to next week, the US Dollar is anticipated to continue its ebb and flow around the latest coronavirus news. Particular attention might be paid to changes in Federal Reserve stimulus efforts, strategies outlined for ending the coronavirus lockdown and restarting economic activity, as well as S&P 500 earnings season.

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The Fed balance sheet appears headed ‘to QE-finity and beyond’ after the FOMC unleashed plans to purchase Treasuries “in amounts deemed necessary.” Aimed at calming funding market stress induced by the recent coronavirus-driven selloff, Fed asset purchases have bulged. This has increased USD liquidity and alleviated upward pressure on the US Dollar in turn.

US DOLLAR MIGHT RISE AS FED TREASURY PURCHASES SCALE BACK, BALANCE SHEET GROWTH DECELERATES

Fed Balance Sheet Chart Federal Reserve Total Assets

Fed officials just revealed that they intend on halving their pace of purchasing Treasuries, however, from $30 billion to $15 billion per day. On that note, decelerating balance sheet growth could provide a degree of support for the US Dollar going forward; particularly if other global central banks continue stretching their accommodative monetary policy stances to offset economic fallout from the coronavirus pandemic.

Also, the US Dollar may get a boost, unintuitively, from exceptionally poor economic data readings. This is considering that USD price action and the broader US Dollar Index tend to benefit during periods of extreme risk aversion in light of its posturing as one of the top safe-haven currencies, which is expected to linger.

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While poor economic data readings are widely expected due to the coronavirus lockdown, the extent of how bad updates to leading economic indicators appears materially underappreciated when comparing actual datapoints to consensus estimates. This is indicated by US economic surprise index taking a nosedive to its lowest reading since December 2008 notched in the midst of the global financial crisis.

US DOLLAR EYES CORONAVIRUS IMPACT ON ECONOMIC DATA, S&P 500 EARNINGS SEASON

US Dollar Price Chart USD Forecast Coronavirus Economic Impact

Furthermore, recent commentary from Fed officials – like James Bullard, Neel Kashkari and John Williams – stuck a cautious tone. Specifically, St. Louis Fed President James Bullard highlighted how that while there is potential for a ‘V-shape’ recovery in economy activity, it will likely be predicated on how quickly we can develop mass coronavirus testing capabilities. Also, Bullard mentioned how there are still ‘heavy downside risks’ faced by the US and global economy despite an unprecedented wave of stimulus.

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Minneapolis Fed President Neel Kashkari added how economic activity looks ‘in for a long and bumpy road until there is a coronavirus vaccine.’ Kashkari stated how the reopening of America from the coronavirus lockdown is likely ‘going to be a slow’ and to expect more job cuts in coming months. Similarly, San Francisco Fed President John Williams outlined his view that the US economy ‘wont be back to full strength by year-end.’

USD PRICE ACTION MIRED BY S&P 500 EARNINGS, TRUMP GUIDELINES FOR ENDING CORONAVIRUS LOCKDOWN

DXY Index Price Chart US Dollar Forecast Eyes S&P 500 Earnings Season

Chart created by @RichDvorakFX with TradingView

S&P 500 earnings season might also have a noticeable impact on USD price action over the coming trading sessions. There is potential that stock market earnings prompt another influx of risk aversion and corresponding ‘dash for cash’ that bids up the US Dollar. This is considering economic reality is likely much worse than what recent stock market gains seem to suggest.

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That said, investor complacency may see past pitiful equity earnings and high-impact economic data as market participants remain forward looking and cheerful over an outline from US President Trump detailing coronavirus guidelines to open up America again and restart economic activity. Although this might present short-term headwinds for the US Dollar, the long-term trend could continue its upward advance amid likely unavoidable recession risk.

Keep Reading – US Dollar & VIX Index Climb; Stock Market Rally at Wits End?

— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight