US dollar index slides after IMF releases damning global outlook report

The US dollar index declined by 35 basis points as the earnings season kicked-off. The currency also reacted to a damning report by the IMF and signs that European countries were preparing to open up their economies.

IMF warns of global growth

The International Monetary Fund (IMF) released a damning report projecting the worst financial crisis since the great depression of the 1920s. The organisation expects the global economy to drop by 3% this year. This was lower than its January forecasts of a 3.3% global growth. In a statement, Gita Gopinath, the head economist said:

“It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the last financial crisis.”

IMF is not the only organisation to warn about global growth. In its earnings report, JP Morgan (NYSE: JPM) said that it was bracing for a deep recession. As a result, the biggest bank in the US allocated more than $6.8 billion to bad loans. This was its biggest provision since the 2009 financial crisis.

Wells Fargo’s (NYSE: WFC) earnings were also decimated in the first quarter. The bank reported revenue of $29.07 billion and earnings per share of 78 cents. Analysts polled by Bloomberg expected the bank’s earnings per share to rise to $1.33. As with JPM, the bank raised its provisions for bad loans to $8.3 billion.

In recent days, top analysts have warned of an impending recession. In a report, Morgan Stanley said that the world’s economy would drop by 0.9% this year. Analysts at Goldman Sachs expect the economy to contract by 1.25% this year. It expects the US economy to slide by 24% in the second quarter and the unemployment rate to jump to 15%.

In another report from the UK, the Office for Budget Responsibility (OBR) said that the country’s economy would drop by a whopping 35% if the current lockdown remains for the next three months.

US dollar index performance

The US dollar index measures the strength of the dollar against a basket of currencies like the euro, sterling, yen, Swedish krona, and Swiss franc.

The underperformance of the dollar was broad-based. It weakened by 0.65% against the Swiss franc and by 0.55% against the euro. It fell by more than 30 basis points against the sterling and Japanese yen.

This weakness is partly because most European countries are preparing to ease their restrictions. In Germany, Angela Merkel will hold a virtual meeting with state leaders to deliberate on how to ease movements. This is after she received a report by the German Academy of Sciences, asking her to reopen the economy gradually. Other countries like Italy and Austria have also started easing movements.

Meanwhile, in the United States, a debate is ensuing on how fast the economy can reopen. On the one hand, Donald Trump has been eager to ease movements to prevent a deeper recession. He has also been under pressure from his business friends such as Tom Barrack and Steven Schwarzman, according to a report by the New York Times. On the other hand, his medical advisors have told him to take it slow because reopening will lead to more infections and deaths.

US dollar index technical forecast

On the four-hour chart, the US dollar index has been on a downward trend. The index has formed a descending triangle pattern, as shown above. The index is also approaching the 50% Fibonacci Retracement level. The index will likely continue moving lower and test the 50% retracement level at 98.80.