|17 July, 2019

King dollar's throne under threat as Fed flags rate cut

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

Website: www.forextime.com

Markets already seem to have factored in a July rate cut by the U.S. Federal Reserve and are beginning to look at what happens next

Dollar weakness is positioned to become a major theme during the second half of 2019 as expectations mount over the United States Federal Reserve (Fed) cutting interest rates.

The doors for lower U.S. interest rates have already been opened by Fed chair Jerome Powell’s dovish remarks during his recent testimony to Congress. With “broad” global weakness clouding the U.S. economic outlook and Powell pledging to “act as appropriate” to sustain an economic expansion, a July interest rate cut seems to be a done deal – the only question remains on how many points the Fed will cut later this month.

Another question on the mind of many investors is what the Fed will do after the so-called “insurance rate cut” this month. The Fed’s action on interest rates beyond July will be dictated by U.S. economic data and most importantly the direction of U.S.-China trade negotiations. Should the trade truce between the United States and China fizzle away as talks drag on, the Fed will have further ammunition to pull the trigger on another rate cut in the second half of 2019.

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 U.S. farm products. This development could be an early warning of possible complications in reaching an agreement to end a trade dispute between the world’s two largest economies.

Although the Greenback is grinding higher against almost every G10 currency - excluding the Canadian dollar, Japanese yen and Norwegian krone – so far this year, bulls are clearly running on empty fumes. The majority of vital factors that boosted appetite for the dollar have reduced significantly, which will likely dampen buying sentiment towards the currency moving forward.

Repeated signs of external risks negatively impacting the U.S. economy during the second half of 2019 will most likely disrupt the dollar’s safe haven status.

Much attention will be directed towards the U.S. manufacturing sector, retail sales figures, labour force and most importantly, GDP data, to gauge the health of the largest economy in the world. Should the ISM Manufacturing PMI in the States gravitate towards 50.0, retail sales slow or U.S. jobs show signs of cooling throughout H2, the dollar will be at threat of losing its throne as another Fed rate cut beyond July becomes reality.

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