The Dollar Forecast: Don’t Count On A Dovish Fed
The Dollar, It Retraced Itself
The dollar index has given up all but the last little bit of its 2020 gains. The move is driven by an increasing expectation the FOMC will cut rates this year and that expectation based on the coronavirus. The coronavirus is spreading around the world, mark my words, the Wuhan Flu is coming to a neighborhood near you. But it’s not that big a deal, not really. No more than a bad case of the flu the pandemic is largely expected to run its course and then we’ll all be back to business. The biggest threats are to corporate earnings and GDP growth.
The Fed, for its part, is still data driven and the data is good, the U.S. economy on solid footing despite two years of trade war. I’ve not know the Fed to act pre-emptively ever so the hope they will try to front-run viral impact to the U.S. economy is misplaced. At least in my opinion. This week we may see things change, there is quite a bit of data on tap, but I don’t think it will support the idea of 1 much less 3 FOMC rates this year.
Topping the list is the Beige Book. The Beige Book report is due out on Wednesday, it is a summary of economic activity across the 12 Federal Reserve operating regions. They key information within this report will be the labor data. The Fed has been reporting tight labor conditions, shortages of workers, and rising wages for many quarters. If that changes we may be in for a deep market correction and contraction of the dollar but I don’t think so.
Along with the Beige Book is the monthly labor data bundle including the ADP, Challenger, and NFP reports. These should show job gains, unemployment, and wages on trend if not accelerating. With that scenario in play, the outlook for the FOMC and rate cuts is going to change and that I think will put a bottom back in the dollar.
The DXY Technical Analysis: Ranges Rule, The Next Leg Is Probably Higher
The DXY shed close to -3.0% over the last week as traders flooded into safe-havens like gold and the yen. This move has erased nearly all the 2020 gains but has not broken support. My best support target is near $97.12 and, so far, buyers are holding prices well above that level. The long-term trend in the dollar is sideways. The $97.12 level is near the bottom of the long-term range so I expect it to hold and confirm as support and point of reversal. That could happen this week as the data is released so traders are cautioned to not get overly bearish with thier dollar trades this week.
