US DOLLAR FUNDAMENTAL FORECAST: BULLISH

• US Dollar may gain on risk aversion if US GDP data undershoots forecasts
• USD spike may be amplified if IMF report shows fragility in global economy
• Will USD strength from higher liquidity demand crush rate cut expectations?

The US Dollar will likely experience higher-than-usual volatility in the week ahead as the IMF prepares to publish its updated outlook for the world economy along with the release of critical US economic data. Depending on the nature of the data, if it falls in line with the fundamental trajectory of slower growth and increased risks to the financial system, the US Dollar may experience capital inflow from panicked investors.

The biggest event risk for the week will likely be the release of US Q2 GDP data. The report is expected to show a quarter-on-quarter annualized growth rate of 1.8 percent which would mark the slowest pace of expansion since Q1 2017. Since February, economic data out of the US has been tending to underperform relative to economists’ expectations. It would not be surprising to see GDP data fall in line with this trend.

ARE ECONOMISTS OVERESTIMATING THE STRENGTH OF THE US ECONOMY?

Note: Data shown in red indicates underperformance, blue means better-than-expected

US Dollar strength may also emerge from the publication of the IMF’s World Economic Outlook update, the title of which in January was “A Weakening Global Expansion”. Given the trajectory of global growth and tense trade relations in developed and emerging markets, it is likely the updated outlook will carry the same pessimistic undertones outlined in January’s report. Only this time, the gloom and doom may be amplified.

With market participants already expecting slightly lower-than-even oddsof a 50 bp cut at the FOMC meeting in July, it leaves increasingly less room for additional dovish expectations. If GDP data undershoots and the IMF report spooks investors, the US Dollar may rise as traders shift from chasing yields to preserving capital. As such, the downward pressure of Fed rate cut bets may be overwhelmed by the desire for liquidity in uncertain times.

CHART SHOWING US DOLLAR INDEX AND IMPLIED FEDERAL FUNDS RATE FOR JANUARY 2020