The broad economic and monetary policy divergence between the United States and other major economies has been a major theme supporting the US dollar.
Market optimism over the strength of the U.S. economy in comparison to everyone else encouraged investors to purchase the greenback in times of uncertainty. With the dollar finding ample support from safe-haven flows and rate hike expectations, it was 'King of the Hill' in the FX space last year. However, the dollar’s outlook for 2019 is swaying in favour of bears after a ‘patient’ Fed announcement and disappointing domestic data from the United States raised questions of the currency’s current valuation. With the core fundamental themes initially supporting the dollar now slowly fading away, the greenback is at risk of losing its firm grip on the throne in the currency space this quarter.
It must be kept in mind that the dollar remains influenced by both external and domestic risk factors. While rising geopolitical risks, fears over slowing global growth and trade tensions have the ability to support the dollar via safe-haven flows, these risks also have the ability to impact the US policy outlook. The dollar is seen facing multiple headwinds in the form of fading fiscal stimulus, political risk in Washington and continual signs of cooling growth in the United States. If the impacts of last year’s monetary tightening start to negatively reflect on the US economy this quarter, the Federal Reserve is likely to take a pause on raising rates to prevent the economy from cooling further.
Falling confidence over the health of the US economy will certainly threaten the dollar’s safe-haven status. The disappointing retail sales report for December 2018, which plunged 1.2 percent - their biggest drop since September 2009 - is already flashing amber lights and suggesting that trade tensions are negatively impacting the world’s largest economy. We see the dollar weakness becoming a major theme in the near term, as political risk in the United States, disappointing domestic data and speculation of a pause in U.S. monetary tightening decrease the Dollar’s competitive advantage against its major peers.
In regards to the technical picture, dollar bulls are showing early signs of exhaustion on the daily and weekly charts. The Dollar Index (an index of the value of the dollar measured against a basket of major foreign currencies) is seen trading lower in the medium term if 97.50 proves to be reliable resistance. Sustained weakness below this level is seen opening a path towards 96.20 and 95.00, respectively.
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