US Dollar Faces Bearish Fundamental Headwinds From The Fed & Trade

US DOLLAR FORECAST – USD PRICES COULD FALL ON SUSTAINED FED BALANCE SHEET GROWTH & LINGERING RISK APPETITE FROM THE SIGNED PHASE ONE TRADE DEAL

  • The US Dollar continues to rebound into the new decade with the DXY Index climbing nearly 1.5% higher year-to-date, but USD prices still trade roughly 2.0% below the October 2019 peak
  • Fundamental outlook for the US Dollar remains unfavorable considering the Fed plans to keep inflating its balance sheet while markets grow frothy in light of an absence of volatility
  • Diminishing US Dollar safe-haven demand could endure amid receding recession probabilities and recovering global GDP growth outlook owing to the newly signed US-China trade deal

USD price action just recorded back-to-back weekly gains according to performance recorded by the US Dollar Index (DXY). The US Dollar has churned about 1.5% higher so far this year, which follows the Greenback’s 3.5% drift lower from October 03 to December 31 that marked a 5-month low.

Future potential upside in the US Dollar could be limited, however, with USD price outlook lacking bullish conviction in light of dissipating fundamental catalysts that have previously helped propel the US Dollar higher.

A pertinent theme likely contributing to the US Dollar’s dominance last year was demand for safe-haven currencies, though this has faded over the last few months alongside perceived recession risk.

DXY PRICE CHART – US DOLLAR INDEX & VIX INDEX OVERLAY: DAILY TIME FRAME (APRIL 2019 TO JANUARY 2020)

DXY Index Price Chart US Dollar Forecast Currency Volatility

Chart created by @RichDvorakFX with TradingView

The unwinding of priced recession probabilities and corresponding retracement in market uncertainty – or volatility – likely explains ebbing USD demand and the string of weakness recorded by the US Dollar throughout 4Q-2019.

This has been driven primarily by the down-throttled trade war between the United States and China, which just produced tangible fruit in the form of a phase one trade deal signed last week by US President Trump and Chinese Vice Premier Liu He.

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