US DOLLAR, STOCK SELLOFF, RECESSION– TALKING POINTS
- US Dollar may gain if US economic data misses estimates, spooks markets
- Stock sell off may continue and redirect capital into the anti-risk US Dollar
- Recessionary fears may overwhelm optimism from Fed rate cut expectations
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The US Dollar may rise against its major counterparts if critical US data – retail sales and industrial production – point to a weaker economy and greater need for accommodative monetary policy. Stock markets may be buoyed by the prospect of cheap credit, though given the current environment of growing recessionary fears, poor data may only just exacerbate the selloff in equities and stoke demand for the US Dollar.
Since February, US economic data has been tending to underperform relative to economists’ expectations, so it would not be surprising to see these reports fall in line with the broader trend. What is even more worrisome is if markets begin to price in dovish expectations from the Fed that are beyond the scope of what the actual central bank has outlined. The last time this happened, equities were hit hard by the July 31 FOMC meeting.
Fed Chairman Jerome Powell said the rate cut was not necessarily the start of an easing cycle but rather a preventative measure used as insurance for future uncertainty. Part of which is the ongoing US-China trade war that continues to plague investors and hamper cross-border investment. The IMF’s recent publication of the updated world economic outlook highlighted trade tensions as a major culprit behind global deceleration.
The sentimentally-fragile environment may have also been compounded by preliminary German GDP numbers that show Europe’s largest economy contracting in the second quarter. This comes while the continent is also struggling with inter-regional politics – namely Brexit and Italy. Against the backdrop of a slowing global economy, political shocks are amplified by virtue of the underlying economic weakness.
CHART OF THE DAY: US EQUITY SELLOFF AMID FEARS OF A RECESSION
S&P 500 chart created using TradingView
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— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter