Considering our base case scenario of moderate global growth in the first half of 2020, the US Dollar is not likely to be in favour with many investors. For the Dollar to retain its uptrend, either the US economy strongly outperforms or the global economy weakens further, triggering capital flows into the safety of the Dollar.
As fears of a global recession have dissipated and the manufacturing cycle looks to be heading for a U-turn in the first half of 2020, expect to see some rotation from the US into the Eurozone and emerging markets. This should benefit the Euro, Chinese Yuan, Brazilian Real and the Indian Rupee.
Another factor that may contribute to Dollar weakness is a dovish Federal Reserve. After three rate cuts in 2019, there is still room for further easing in 2020, especially if business investment remains fragile and consumer spending begins to weaken. However, in currency markets, there’s always a high probability of being surprised.
Fiscal easing into 2020 elections
With the US Presidential elections less than a year away, the chance of another fiscal boost isn’t out of the question. Whether President Trump announces another tax cut, an increase in spending levels or a combination of both, this would push bond yields higher and attract more capital inflows, especially given the low yield environment elsewhere. In this scenario, instead of remaining on hold or lowering interest rates, the Federal Reserve would have no option but to raise interest rates in anticipation of higher inflation. Under this theme, the Dollar is likely to move higher and break above 2019 highs.
Trade tensions intensify again
Financial markets have welcomed the “phase one” US-China trade deal and hope it’s the first step towards long-term trade peace. However, no one can guarantee that tensions won’t intensify again. If they do, expect another wave of outflows from emerging markets and other developed countries into the US. This scenario will see the USD outperform against its major counterparts.
Time for Dollar to step off its throne?
From a technical standpoint, a death cross (when its 50-day moving average moves below its 200-day moving average) is forming on the Dollar Index, which indicates the potential for a major decline.
If 97.80 and 98.50 prove to be stubborn resistance levels and the death cross materialises, the Dollar Index has the potential to slip towards levels not seen since June 2019 at 96.00. A solid daily close below this support should inspire a steeper decline towards 95.25. Should the downside momentum result in the Dollar Index breaking below 95.25 level, the next key support will be around 94.00, a level not seen since 2018.
Alternatively, the Dollar could maintain its grip on the throne if prices can push back above 97.80. A solid close above this point should open the path towards 98.50 and 99.00.