US DOLLAR FUNDAMENTAL FORECAST: BULLISH

• US Dollar gains with Treasury bonds as financial markets turn defensive
• EP elections, OECD outlook update may recommit traders to risk-off bias
• Running official commentary on US-China trade war remains a wildcard

The US Dollar accelerated higher last week. A five-day winning streak marked the longest run of consecutive gains in two months, bringing the currency’s value against an average of its major counterparts within a hair of the 2019 high.

The advance ran parallel to rising Treasury bonds while the priced-in 2019 Fed policy outlook moved to a more dovish setting, signaling the markets now see a higher probability of a cut (now pegged at 75 percent). That points to haven demand against the backdrop de-risking as the impetus for gains.

The escalation of the US-China trade war stands out as investors’ top immediate concern. It compounds existing geopolitical uncertainties linked to Brexit, the European Parliament (EP) elections and growing tensions between the US and Iran. It also amplifies an existing slowdown in global growth.

USD MAY RISE AS FED TAKS DOWN RATE CUT PROSPECTS IN RISK-OFF TRADE

The week ahead will see these risks reiterated. Voting in the next crop of MEPs has been positioned as a referendum on the merits of the EU as a whole, with markets nervous as euroskeptics of every stripe angle for a greater mandate. Meanwhile, the OECD will probably downgrade its global economic outlook.

The Fed might unnerve investors further by reiterating that hopes for a lifeline from monetary policy are almost certainly misplaced in the near term. A speech from Chair Powell and minutes from May’s FOMC meeting will probably hammer home officials’ preference for a “wait-and-see” approach.

On balance, this bodes well for the Greenback. Another round of market-wide de-risking is likely to put a premium on the benchmark currency’s unrivaled liquidity, sending it higher. While yields are not the top concern in this scenario, a Fed in stasis while other central banks plan easing surely doesn’t hurt.

US-China trade talks remain a wildcard. Prices have proven to be responsive to the running commentary on negotiations from media outlets linked to the government in Beijing as well as US President Donald Trump’s Twitter account. Soundbites from either camp might inspire knee-jerk volatility.