Global Economic Outlook Keeps Clouding

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Global stocks have been on the defensive at the start of the week, struggling to extend the rebound seen last Friday. Chinese shares fell after the data showed that both industrial production and retail sales contracted sharply in March. Furthermore, the outlook for the second-largest economy remains weak as the pandemic continues, while geopolitical tensions across the globe add to risks for growth. 

Meanwhile, Fitch Ratings said on Monday the global fiscal recovery is expected to continue to slow in 2022 and 2023 amid rising borrowing costs, slowing real GDP growth and the developments surrounding Ukraine. Adding to the evidence of a clouding economic outlook, the European Commission has lowered the Eurozone economic growth forecast for 2022 to 2.7% from its previous estimate of 4%. For the next year, the growth forecast was revised lower to 2.3% from 2.7%.

Rising expectations for slower growth, echoed by major institutions and investment banks (Goldman Sachs cut its 2022 US GDP growth forecast to 2.4% from 2.6% over the weekend) suggest the safe-haven demand for the dollar will continue to persist both in the short and longer term. In this context, there is a risk that the Fed could hurt US economic growth by too aggressive tightening measures. So far, however, the greenback shrug off those worries, continuing to capitalize on risk aversion. 

The USD index came slightly off twenty-year highs on Monday as traders take some profit following last week’s rally. The buck derives support from the 104.30 zone, followed by the 104.00 handle. Should the index derail this figure in the near term, last week’s lows around 103.40 will come back into the market focus. However, the US currency is likely to attract dip buyers as the bulls remain in control while above 92.00.