At the beginning of 2018 it looked like the combination of proposed infrastructure spending, tax cuts and expected interest rate rises could have supported the USD. Despite a poor first quarter, the USD rallied as the four interest rate hikes materialised and the benefits of the tax cuts, especially for corporations, meant record earnings growth during 2018. The USD Index gained more than 4.3% over the course of the year. The rally in both the USD and US Equity markets turned down in the final weeks of the year.
Expectations are that there will only be one or two rate hikes this year as signalled by the Federal Reserve, as the economic outlook for the US cools. Many are even suggesting no rate hikes at all for 2019 as corporate earnings slow and the trade war impact ripples out. Recession has been mentioned as a possibility for late 2019 as the much anticipated “yield curve inversion” (where short-term yields are higher than long-term yields) is expected to occur.
A recession for the US economy is unlikely in 2019, as is a significant slide in the USD; other central banks are far from hawkish as their economies are also slowing. US core inflation rose above the key 2% level earlier in 2018 but has slipped since. Wage growth pressures are finally gaining momentum and GDP growth has also held up. If the anticipated slowdown in US growth does occur in 2019, then the critics of the Fed (including the President) will be proved right in their assertion that the central bank tightened policy too quickly.
A strong USD traditionally goes hand in hand with a strong US economy and trade has always been a key component of a resilient US economy. The continuing trade war with China looks increasingly fractious, even though a 90-day easefire was negotiated in November and both sides are committed to reaching a deal. Still, this looks difficult, as a compromise must be reached in three tricky key areas: Intellectual Property, Market Access and China 2025. All three need to be addressed if the word “tariffs” is not, once again, to be one of the words on everyone’s lips this year.
The Republicans have lost their majority in the House of Representatives and with a highly unpredictable President the potential remains for a much more divided US political system in 2019. If, as anticipated, the US economy cools, this will weigh on sentiment, investor confidence and ultimately the USD.
Outlook for the USD Index:
– Technically Neutral
– Pivot Point – 95.90
– Support – 94.25, 92.85 and 91.20
– Resistance – 97.30, 98.95, and 100.35
USD Index Review
– Political Risk – The unconventional President Trump with a reduced mandate could become more
flexible at home whilst becoming increasingly more isolated internationally.
The Mueller investigations remain ongoing but chances of an impeachment remain slim.
– Trade relations (especially with China) likely to be much more in focus.
– FOMC likely to be more dovish with Equity and Bond Markets more volatile than in 2018.