Fundamental Forecast for US Dollar: Bearish
The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) fell for 10 consecutive trading days and finished at multi-month lows on a wave of mediocre US economic data and a sharp rally in global equity markets. Can it continue to fall in the week ahead?
Traders will look to the coming week's US Federal Open Market Committee (FOMC) Meeting Minutes and Consumer Price Index inflation figures to drive Dollar moves. Yet it may take some sharply positive surprises out of FOMC minutes or other economic data to shake the Greenback from two consecutive weeks of declines. Why?
An important drop in FX volatility prices shows that few are betting on and/or hedging against big currency moves through the foreseeable future. Given that the safe-haven US currency tends to do poorly in slower-moving markets, conditions may prevent a meaningful Dollar rebound. Of course any surprises out of Fed minutes could change that in a hurry.
The Federal Open Market Committee has now scaled back its Quantitative Easing program by
Attention will then turn to Thursdays US CPI inflation figures. Consensus forecasts point to a relatively lackluster inflation print through January, and recent Fed rhetoric suggests that officials do not fear a significant pickup in price pressures through 2014. Such complacency nonetheless leaves risks to the topside; it would take a relatively modest upward surprise to spark a US Dollar bounce.
The Greenback has a difficult week ahead with low volatility and a resurgent US S&P 500 limiting demand for relatively safe currencies or financial assets. Of course as our Senior Currency Strategist points out the calm always comes before the storm in financial markets.
Long-term volatility prices for the Euro/US Dollar exchange rate recently fell to their lowest levels since the onset of the global financial crisis in 2007. The declines show little fear of huge swings in the EURUSD or elsewhere. But that likewise implies that it could take fairly little to shake markets out of complacency.
It's difficult if not impossible to place trades on the "unknown unknown", and our short-term Dollar forecast remains bearish. Yet it will be important to keep an eye out for unexpected developments that could materially shift US Dollar and financial market forecasts. - DR