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Future Outlook of US dollar and forex trading

forexThis article will discuss at length what the big analyst houses have to say about the future of US dollar in 2016 and forex trading, including UniCredit, Societe Generale and BMO.

The major stock markets, around the globe, have witnessed a cascading trend since the beginning of 2016. S&P 500 registered a negative growth phenomenon, as stock market index was down by 7.9% in the beginning of the year. There are a number of factors that are affecting the positioning of the US dollar in the forex market. Succinctly, the domestic as well as the international events, including but not limited to the occurrence of US presidential elections, negative sentiments about the Chinese stock market, Brussels attacks, etc, are all playing their respective parts in shaping the outlook of the US dollar in the forex market. Keeping in view the changing world scenario, it is difficult to accurately predict the future course of US dollar in forex trading, as political and economic factors are dynamic in nature.

Although the financial analysts seem to be divided on the issue, a significant majority unanimously predict the peak in the US dollar.  It is anticipated that the movements of the US dollar demonstrate that it is on its way of entering in the mature phase of its cyclical bull market, which is suggested to end before the second half of 2016. Same news came from the forex trading circles, as the traders are of the view that there appears to be a considerable shift in the behaviour of the currency since the mid of February, pointing towards a scenario putting US dollar at the verge of a bigger downward cycle. Now, this came out to be a controversial debate but, what is becoming apparent with the passage of time is the fact that no further highs can be witnessed in the current multi month cycle of strength of the US dollar.

Perhaps, the major indicator that has raised doubts about the future health of the US dollar came from the Federal Reserve. In its March policy meeting, Fed has decided to trip dollar by revising their expectations of interest rate over the coming months. In lieu of this, the recommendations of the US Central bank will result in generating only two hikes, contrary to what was seen in 2015. This move of Fed has resulted in significantly crushing the support for the US dollar. It is so because the major reason of US dollar outperforming in 2015 was the assumptions of higher interest rates in 2016. Questions on these future assumptions have contributed in making the character of dollar dubious, thereby, forcing the analysts to revisit their claims of a strengthening US dollar in 2016.

Many of the analyst houses that have predicted a stronger dollar in the current year have been seen taking u turn on their stance. Consider, for example, the case of UniCredit, an acclaimed Italian name in global banking and financial services. UniCredit holds a macro opinion on the issue explaining that dollar is overbought and the forex market is witnessing trading levels that are by no means economically justifiable. The global head of the Foreign exchange Strategy at UniCredit, Gkionakis, comments the following on the situation:

What began as a re-alignment with fundamentals, higher US real yields in 2H14, quickly escalated into a frenzy of dollar longs in 1H15, sending the USD sharply higher – much higher than could have been justified by the macro underpinning.”

Like predictions were being put forth by a French multinational banking and financial company, Societe Generale, warning their clients about the underperformance of the US dollar in 2016.

“Beyond the near-term, the dollar’s advance has stalled this year. With the Fed turning cautious, it is difficult to see new cycle highs in the dollar against either euro or yen this year,” says Alvin Tan, a senior strategist at Soc Gen.

Bank of Montreal (BMO) had initially forecasted a higher dollar in 2016. However, in the wake of the changed scenario, they re-established the assertion that the anticipation is proving out to be wrong. The global head of the FX strategy at BOM, Greg Anderson, holds the opinion that the uncertainty surrounding the American nation in the face of USA Presidential election is a key player in US dollar story. Because of this election practice, the economy is exposed to the idea of trigger hedging, coming into play earlier this year. Normally, the concept activates three months prior to the election exercise.

“Foremost are the Donald Trump phenomenon and his accusations that China, Japan and others manipulate exchange rates for trade advantage. With her opposition to the TPP, Hillary Clinton is also showing a protectionist side, and protectionists normally look to suppress their currencies… With its potential closeness and these issues, the election looks likely to be a negative factor for the USD until Election Day (08-Nov),” says Anderson.

Summing up the above debate, almost a large chunk of financial and forex trading analysts unanimously agree that a strengthening mode for US dollar is a bubble that will end in the first half of 2016. Since, the dollar has peaked and has come to the point of saturation; estimates predict no further highs in the dollar position, leaving room for the Emerging Markets (EM) currency to outperform.

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About Emaad Qureshi