What to watch out for in USD in the next three months

The US dollar was the best performing currency in the G10 in Q2 but was a middle table player in the third quarter, taking 2% out of the yen, gaining 1% against the pound but losing 1.6% against the Swiss franc. But the question is: can a busy Q4 see the dollar finish the year on a high?

Here are three things in Q4 that will govern the US dollar:

The Midterms to give Trump a bloody nose

It is our expectation that the Democrats take both the Senate and the House away from Donald Trump and the Republicans and, while that sounds like a strong political shift against the administration, it is unlikely to mark much of a market shift. Indeed, since the polling on the midterms has started to stabilise market expectations that the midterms will give Trump a bloody nose, the dollar may be able to escape.

Were the Republicans able to manage a ‘win’ then risky assets and the dollar would push higher on the basis of a belief of further fiscal support and the possibility that the most recent tax cuts would be made permanent; in other words, it would ensure the stimulus that has boosted the US economy.

US voters will go to the polls on November 6th.

US vs China heating up

The temperature of trade tensions between the US and China increased in the third quarter with fresh tariffs imposed by the US and the Chinese retaliating in kind. We are yet to see a true economic reaction to the higher costs imposed on Chinese imports in the US yet but that is not to say they are not on the horizon.

Coming at a time when the impact of the fiscal stimulus on the US economy is starting to wane and oil prices are the highest level since 2014, headwinds to the US economy at the moment may be enough to stifle growth from its current run rate of 4.2% annualised to around 3%. At a time when that remains ahead of most developed markets, the divergence between the US will be dimmed but not gone and the dollar supported as a result

 Mueller investigation in the background

As with the last quarter, we have seen some progress on the Mueller investigation into collusion between Russia and the Trump campaign but, crucially, nothing concrete as yet. We expect the dollar to remain closely tied to the risk atmosphere with any threats to the Trump administration deemed as a dollar negative.

In summary…

We still think that the strongest indicator of USD strength is the performance of the US economy and while we think GDP will slow in the coming few quarters from Q2’s monster numbers, the dollar should still hold up into the end of year.

You can keep up to date with all the latest news, commentary and predictions for the dollar by signing up to the free WF morning update delivered to your inbox every weekday morning.

You might also be interested in our Q4 Euro Outlook or Q4 GBP Outlook