The combination of the tame inflation report, comments from Fed Chair Powell on cooling international demand and the dovish comments from Fed Vice Chair Clarida defining that the Fed is acquiring closer to neutral, are all signs the Fed may slow its speed of rate treks and this should be bearish for the U.S. Dollar.
Last week, the U.S. Dollar stopped up lower against a basket of the currencies. Nevertheless, it wasn’t a regular weakness, it was a technical finishing price exchange top, which means the selling was sober. If proved this week, we could see begin of a two to three-week rectification. Additionally, if the selling demands makes physically powerful over the near-term, we could even see alteration in trend to down.
Last week, the December U.S. Dollar Index settled at 96.333, down 0.401 or -0.41%.
Even though it is frequently said, that technical analysis precedes the fundamentals, this time the probably bearish chart example appears to be working in sync with a change in the fundamentals.
For years, we’ve read that the dollar is being supported by the difference of opinion in economic policy between the hawkish U.S. Federal Reserve and the dovish central banks. In other words, rising U.S. interest rates at a time when several central banks are still holding rates at historically low levels, have made the dollar a highly desirable asset.
We’ve also read that at times, the dollar was being treated as a safe-haven asset. The “go to” asset throughout times of financial pressure. This has been a well-liked asset theme in 2018 because of the heightened volatility in the stock market, political uncertainty in Washington and geopolitical indecision over Brexit and the simmering tension between Italy and the European Union. Moreover, the pressure created from the remaining trade dispute between the United States and China, has also illustrate investors into the relative safety of the U.S. Dollar.
Dollar fight backs at 16-month High
Early last week, the U.S. Dollar hit a 16-month high against a basket of currency. The move happened without much fanfare because investors have gotten used to the stronger dollar. The early rally was fueled by safe-haven flows ignited by political uncertainties in Europe and fears of an international financial brake.
The headlines told us that investor self-confidence had been eroded by “bitter trade tensions between the United States and China, fears of a no-deal Brexit, and a confrontation between Rome and Brussels over Italy’s deficit-deepening financial statement.”
Three Factors Pressured the U.S. Dollar Last Week
The dollar index started strong on Monday, but many investors discounted the move because it was a U.S. holiday. Tuesday, the dollar index came to an end lower but inside the preceding day’s range. On Wednesday, the selling started. This move set the tone for the rest of the week.
What happened Wednesday that changed investor response?
Inflation May Not Be Overheating
The administration reported that U.S. consumer prices amplified by the majority in nine months in October. The report showed that the increase was supported by increase in the price of gasoline and rents. This further supported the conception that progressively rising inflation would likely keep the Federal Reserve on track to raise interest rates again in December.
Despite this potentially bullish news, the dollar finished lower. The reason for this was the news was stale. It didn’t reproduce the slouch in crude oil and gasoline prices. So moving further, we expect to see overall inflation slow in the months ahead. This news may also be a suggestion that inflation is not overheating. It may also put less pressure on the Fed to raise rates forcefully in 2019.
Powell Sees Risks Ahead
Comments from Federal Reserve Chairman Jerome Powell may have also weakened the U.S. Dollar. He said on November 14 that the financial system is performing well, but he sees potential risks in front. These risks contain a hold up in worldwide growth, the fading impact from tax cuts and the cumulative weight of the Fed’s own tightening financial policy.
Fed’s Clarida May Have Sealed Dollar’s Fate
On Friday, the dollar index chop down further, leading to the lower weekly close. The greenback sold off after Fed Vice-Chair Richard Clarida cautioned on global growth. Clarida said the Fed is getting closer to neutral and that there is “some evidence” that the international financial system is slowing.
The outlook for Dollar Bearish
The combination of the tame inflation report, comments from Fed Chair Powell on cooling global demand and the dovish comments from Fed Vice Chair Clarida stating the Fed is getting closer to neutral, are all signs the Fed may slow its pace of rate hikes and this should be bearish for the U.S. Dollar.