Forex – Weekly Outlook: May 27 – 31

Forex - Weekly Outlook: May 27 - 31 – The latest developments in the U.S. – China trade war will be closely watched by investors in this holiday shortened week, as will EU election results, a fresh batch of global economic data and the swirling leadership crisis in the U.K., which has increased the prospect of a no-deal Brexit.

The U.S. dollar fell against a currency basket on Friday, retreating further from two-year peaks, after weaker than expected U.S. economic data added to the view that the economy is losing momentum.

A report showing a decline in orders for U.S. durable goods, coming a day after data showing that manufacturing activity hit its lowest level in almost a decade in May added to fears that the trade dispute with China is hitting growth.

The dollar index was down 0.26% at 97.465 in late trade. It was also 0.8% off a two-year high of 98.260 hit in the previous session.

Some analysts initially believed that a trade war would be a boon for the U.S. dollar – both because the currency serves as a safe haven in times of uncertainty and because the U.S. was likely to be hurt the least, but that has not proven to be true.

“The IMF suggests that U.S. import tariffs are mainly paid for by U.S. companies, depressing their profit margins. Hence, it should not be surprising to see U.S. capex plans being cut radically, which should soon translate into moderating labor market conditions,” wrote Hans Redeker, global head of foreign exchange strategy at Morgan Stanley.

Escalating trade tensions and weak data have fueled rate cut expectations by the U.S. Federal Reserve. Money markets now broadly expect one rate cut by October followed by another by January 2020.

“In the current circumstances, we strongly suspect that further escalation in protectionism will lead the Fed to consider easing policy,” wrote Michael Hanson, head of global macro strategy at TD Securities. “Increases in inflation should be relatively short-lived, while the hit to growth could be more persistent.”

The dollar was weaker against the yen, down 0.26% to 109.29.

Dollar weakness also helped boost sterling from a 4-1/2-month low, though the rally was primarily driven by U.K. Prime Minister Theresa May’s announcement on Friday that she would quit after failing to deliver a Brexit deal.

The move sets up a contest that will bring a new prime minister to power who could pursue a cleaner break with the EU. The pound was last up 0.5% at $1.2713.

The euro was also stronger on Friday, up 0.28% to $1.1209, boosted in part by the weaker dollar.

Ahead of the coming week, has compiled a list of significant events likely to affect the markets.

Monday, May 27

Financial markets in the U.K. and the U.S. will be closed for holidays.

Tuesday, May 28

U.S. House Price Index (YoY) (Mar)
CB consumer confidence

Wednesday, May 29

ECB financial stability review
BoC interest rate decision
Thursday, May 30
U.S. prelim GDP (Q1) 
U.S. Trade Balance (Apr)
U.S. initial jobless claims 
U.S. wholesale inventories (Apr) 
U.S. pending home sales (Apr)
FOMC Member Clarida Speaks

Friday, May 31

China manufacturing and non-manufacturing PMI’s (May)
Canada GDP (Mar)
U.S. Core PCE Price Index (Apr) 
U.S. personal income and spending (Apr)

–Reuters contributed to this report


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