The US dollar has started to lose upside momentum yet again, picking up pace towards the back-end of the latest week.
The pressure to the downside came following a couple of noteworthy market developments; the main one very much occurring in trading on Thursday. Given the bad run of economic data from the United States that has been seen of late, the futures markets have begun to price in further action from the FOMC.
It could be indicated that there is now a growing expectation for negative interest rates in the US, being priced in for early 2021. It is dovish and a USD negative. Remember rate cuts, in general, are not good for a respective currency as it drives away foreign investment, less demand for USD. Keep in mind this would be on top of all the stimulus currently being conducted by the central bank.
The other point to consider for this dollar pullback is signs of tensions easing between the United States and China. U.S. and Chinese negotiators had agreed to strengthen cooperation over a trade deal. Top U.S. and Chinese trade representatives discussed their Phase 1 trade deal late on Thursday into Friday, with China saying they agreed to improve the atmosphere for its implementation and the United States saying both sides expected obligations to be met.
In terms of the discussion, it came on the back of escalating tension between the countries, exacerbated by President Trump’s criticism of China’s handling of the coronavirus outbreak.
What does this mean for the markets?
If data from the United States continues the current theme of being poor, USD will likely be further hit, as markets gain more incentive to price in negative interest rates. Additionally, with governments globally still gradually announcing the easing of social distancing restrictions, this is a boost for market optimism. Riskier currencies like AUD, NZD, CAD would be supported, with the noted theme.
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