The following guest post is courtesy of Thomas Hall.
In October, the Federal Reserve cut interest rates for the third time in 2019, with the intention of maintaining the US’ longest period of economic growth ahead of the 2020 presidential election. For the incumbent President, those cuts still aren’t enough. Trump has regularly pressured the Fed into slashing interest rates throughout his presidency, but the Fed have remained more moderate amid the US-China trade dispute.
These important themes of 2019 are likely to recur in 2020. Exchange rates, inflation and politics are all inextricably linked to the fate of the dollar.
The Fed hopes that lower interest rates will stimulate economic growth and encourage greater investment. By lowering these rates at a slower pace than Trump desires, the Fed aims to prevent any dramatic fluctuations in exchange rates with other key economies. The US dollar’s status as the world’s primary reserve currency ensures that it plays the most significant role of any currency in the global forex markets.
The USD features in most of the most frequently traded currency pairs, including EUR/USD. With the US currently in a period of sustained economic growth and traditionally a provider of a ‘safe’ investment, the USD will remain attractive to traders on the forex market in 2020.
Some analysts are advising traders to go long on EUR/USD, given that the Eurozone has posted an industrial bounce in the last quarter and that Germany avoided a recession. However, the aggressive easing policy set to be introduced by the European Central Bank could see the dollar regain its usual position of strength compared to the EUR.
In October, there were indications that the Fed would provide a further cut to interest rates in the opening months of 2020, a response to diminished consumer spending and doggedly low inflation rates. The Fed measures inflation levels through the core PCE index, which posted figures of 1.8% in August and 1.7% in September. These figures fell short of the 2.0% target set out by the US Central Bank.
It now appears that the Fed may avoid having to deliver further cuts, at least in the short-term future. A rebound in consumer prices in October subsequently boosted inflation, while job growth also surpassed expectations for that month.
However, inflation will ultimately remain below the Fed’s 2.0% target, so a strong October may not be enough to stave off further interest rate cuts later in 2020. Market research places the likelihood of two cuts in 2020 at around 56%. If the Fed can’t find a way to bring inflation in line with expected levels, then the dollar may struggle or stagnate in 2020.
The 2020 election campaign will dominate most of the calendar year. The USD could fluctuate as election polls indicate who is gaining or losing ground at any given moment, depending on each candidate’s proposed economic policies.
Even without the election, the protracted US-China trade dispute makes it difficult to confidently assess the fortune of the USD in 2020. A ‘phase one’ deal was expected to have been completed by now, but Beijing have called for greater tariff concessions.
The White House is reluctant to make further compromises, a stance that could actually strengthen the dollar. With rumours of a delay to the deal by around six months, it could mean that the dollar eventually takes a hit midway through 2020 once the nature of that deal is announced.
As always in the ever-changing world of currency trading, it is difficult to make yearly predictions for the fate of the dollar. Traders will be keenly tracking the economic policies and the US-China trade dispute in the hope of determining the shape of the dollar’s future.
What lies ahead for the US Dollar in 2020? was first posted on November 29, 2019 at 10:47 am.