By Lukman Otunuga Research Analyst at FXTM
By Lukman Otunuga Research Analyst at FXTM

Dollar running on borrowed time as Fed dangle keys to rate cut

King Dollar’s iron throne will be under threat during the second half of 2019 as expectations intensify over the Federal Reserve embarking on a monetary policy easing cycle.

First Published: e-Forex Magazine 87 / Currency Clips / July 2019

Dollar running on borrowed time as Fed dangle keys to rate cut

King Dollar’s iron throne will be under threat during the second half of 2019 as expectations intensify over the Federal Reserve embarking on a monetary policy easing cycle.

Fed Chair Jerome Powell has already set the ball rolling for the first US interest rate cut in a decade thanks to his firmly dovish remarks during testimony to Congress. With “broad” global weakness clouding the US economic outlook and Powell pledging to “act as appropriate” to preserve an economic expansion defended by trade tensions, a July rate cut seems all but a done deal. Investors who were hoping for June’s US “Goldilocks” jobs report to sway Fed doves were left empty-handed after the central bank head stated that “since the June meeting and even for a period before that, data has continued to disappoint” – ultimately reinforcing probability of a rate cut.

A major question lingering on the mind of many investors is what the Federal Reserve will do after the dubbed “insurance rate cut” in July. The Fed’s actions beyond July will be heavily influenced by US economic fundamentals and most importantly the direction of US-China trade talks. Should the trade truce between the United States and China crumble as talks drag out with no deal in sight, the Fed will have further ammunition to pull the trigger on rate cuts for the second time in H2. There seems to be a sense of tension already in the air after Trump said China was letting the United States down by not buying US farm products. This development could be a warning sign of possible complications to reach an agreement to end a trade war between the world’s two largest economies.

Although the Greenback is grinding higher against almost every single G10 currency excluding the Canadian Dollar, Japanese Yen and Norwegian Krone year-to-date (YTD) – bulls are clearly running on empty fumes. Most of the fundamental ingredients initially sweetening appetite for the Dollar have expired and this will most likely sour buying sentiment towards the currency moving forward. While the perception that the United States remains in better shape in comparison to everyone else may come to the Dollar’s rescue, this lifeline will be constantly threatened by trade tensions and soft economic fundamentals.

Signs of external risks bruising the US economy during the second half of 2019 will most likely negatively impact the Dollar’s safe haven status. There will be a special focus on the manufacturing industry, retail sales, health of the labour force and most importantly GDP figures. Should the ISM Manufacturing PMI in the US gravitate towards 50.0, retail sales slip from the 0.5% achieved in May and NFP reports dish out negative surprises throughout H2, Dollar weakness is positioned to become the next major market theme.

In regards to the technical picture, the Dollar Index has traded within a wide range since the start of the year with support at 95.20 and resistance found at 98.20. With bears lingering in the vicinity amid rate cut bets, the path of least resistance for the Dollar Index points south. A breakdown below 95.20 should set the ball rolling for a decline towards 94.00, 92.20 and 90.00.