(MENAFN - DailyFX) US DOLLAR WEEKLY FUNDAMENTAL OUTLOOK – BEARISHThe US Dollar swooned over the last 5 trading sessions as Fed rate cut bets rise in response to heightened US-China trade war uncertainty US Dollar selling pressure could accelerate if high-impact economic data like CPI, retail sales and consumer sentiment readings disappoint Check out ourQ3 USD Forecastfor longer-term outlook with comprehensive fundamental and technical analysis
The US Dollar dropped sharply this past week with theDXYIndex sinking roughly 1%.USDweakness was primarily driven by the market pricing in greater probabilities that the Federal Reserve will cut rates again at thenext FOMC meetingfollowing a turn for the worse in the US-China trade war with Trump's threat of hiking tariffs further. Even though Chair Powell talked down theJuly Fed rate cutas a 'mid-cycle adjustment' in the follow-up press conference, theFOMCstatement noted that the central bank 'will act as appropriate to sustain the expansion.'
FED RATE CUT BETS REMAIN ELEVATED ALONGSIDE US-CHINA TRADE WAR UNCERTAINTY
That said, the market's priced expectation for the Fed to loosen monetary policy once more will largely be driven by US-China trade war developments in the coming days. For a possible barometer, currency traders couldwatch USDCNH to gauge US-China trade warescalation which would likely drag down the greenback more broadly relative to theEuro , oranti-risk currencieslike theJapanese YenandSwiss Franc . Additionally, the release of closely watched economic indicators next week have potential to spark a reaction in Fed rate cut bets and drive the direction of the US Dollar as well.
US DOLLAR – FOREX ECONOMIC CALENDAR
Using theDailyFX Economic Calendar , we can filter out some of the noise and hone in on high-impact event risk that has potential strongarm price action. Looking to next week, currency traders might anticipate volatility aroundUS inflationdata expected to cross the wires Tuesday at 12:30 GMT in addition toretail saleson Thursday at 12:30 GMT and consumer sentiment on Friday at 14:00 GMT.
Reductions in the target federal funds rate have long been priced in by traders, but the magnitude and longevity of the interest rate cuts remains ambiguous. Yet, rate cuts currently priced in likely won't respond materially to better-than-expected US economic metrics whereas disappointing data prints could accelerate the odds of an aggressive Fed rate cut in the near future.
US DOLLAR PRICE CHART: DAILY TIME FRAME (MARCH 28, 2019 TO AUGUST 09, 2019)
In light of this, the relative steepening or flattening of theUS Treasury yield curve– measured via 3m10s yield spread (shown above in blue) – has potential to serve as a bellwether to where the US Dollar heads next.
Also, USD selling pressure could be sparked if the Trump Administration reignites pressure on the Federal Reserve to make deep interest rate cuts aiming to weaken the greenback thus making the currency and domestic exports more competitive. However, potential USD downside in response to this development, if manifested, could prove to be short-lived if the Fed shies away from moving aggressively as to not jeopardize credibility or the US Dollar as theworld's reserve currency.
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-- Written byRich Dvorak , Junior Analyst forDailyFX.com
Connect with@RichDvorakFXon Twitter for real-time market insight