USD is liable to drift lower in the short term as optimism that the global economy will stabilise during 2020 encourages investors to invest in alternative assets such as commodity currencies.
Trading volumes will be low
A lack of market liquidity will be a key feature during the week with very low trading volumes during the European US holiday season. In this environment, the most likely outcome is narrow ranges in currency markets, although there will be the risk of erratic market moves on unexpected events.
The durable goods orders data will be released on Monday, but data is unlikely to have a significant impact.
Trade rhetoric from President Trump will be monitored during the week.
It is also possible that the Treasury will release its latest currency report. Any move to de-list China as a currency manipulator would help boost risk appetite.
Market themes for 2020
As the new year approaches, markets will be looking ahead to the main themes of 2020.
Conditions within the US economy and outlook for monetary policy will, as always, have a crucial impact on market trends. The Fed is currently projecting rates to be broadly stable during the year. Resistance to raising interest rates even if the US economy strengthens would tend to weaken the dollar.
US politics important
US political trends will be important ahead of the November presidential and congressional elections. The choice of President in November will be vital for the US and global direction. From a market perspective, a key element will be on the impact of Chinese relations.
Assuming President Trump survives the Senate impeachment trial, markets will be watching the Democrat Party race to select their Presidential candidate.
Politics and monetary policy are also likely to clash further with President Trump liable to intensify his calls for lower interest rates and a weaker dollar to underpin the economy.
US-China trade developments will continue to be important with an immediate focus on signing the phase-one trade deal. Talks will probably then stall until after the US Presidential election, although underlying tensions will remain high.
Wider US trade policies will also be important with the US liable to target the EU during the year.
Defeat for Trump in November would tend to boost confidence in the global trade outlook.
The Chinese economy will continue to have an important impact on confidence in the global outlook. After a tough 3019, comments from Chinese officials suggest further difficulties in 2020.
Big year for Europe
Within Europe, Brexit will continue to have an important impact. Following the December General Election result, there is a very strong probability that the UK will leave the EU on January 31st.
The UK will then enter a transition period which is scheduled to end at the end of 2020. The government has insisted that this deadline will not be extended and both sides will, therefore, need to secure a trade deal before the end of 2020. This is a very tight timetable and, if the talks start badly, there will be fresh fears over a disorderly outcome at the end of 2020.
The UK parliamentary dynamics will, however, be completely different in 2020 with the Conservative Party holding a strong majority.
A crucial element during the year will be whether the European economy recovers. If there is an improvement, especially in Germany, the Euro would be much better placed against the US dollar. Optimism over EU-UK trade talks would be a vital element boosting confidence in the economic outlook.
Currency FX Forecast for Next Week
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