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Forex: US Dollar Targets Losses, but Trading Defensively into January

By , Quantitative Strategist
14 December 2012 23:15 GMT
us_dollar_trading_forecast_body_Picture_5.png, Forex: US Dollar Targets Losses, but Trading Defensively into January

US Dollar Targets Losses, but Trading Defensively into January

Fundamental Forecast for US Dollar: Bearish

A fresh wave of Quantitative Easing from the US Federal Reserve was enough to push the US Dollar (ticker: USDOLLAR) lower cross the board, and current price momentum leaves short-term trading outlook in favor of Greenback losses.

The US Federal Open Market Committee (FOMC) announced an extension of monetary policy easing policies and the US Dollar’s reaction left little doubt on traders’ opinions of the move. An impressive Friday sell-off left the Greenback at fresh 7-monthlows against the Euro. A comparatively limited week of event risk ahead suggests that volatility may slow, but recent Fed actions will place increased scrutiny on any surprises in upcoming US economic data.

The final revision to Third Quarter US GDP growth could force some sharp short-term swings in the US currency, while late-week Personal Income and Spending as well as PCE Deflator results may affect inflation and employment expectations. Consensus forecasts call for an effectively unchanged GDP print, while economists predict that national Personal Income and Spending jumped considerably in November.

The Fed committed to a further $45 billion in monthly purchases of long-term Treasury securities, and it tied the otherwise open-ended easing to national unemployment rates at 6.5 percent and annualized inflation of 2.5 percent. In effect this means that any US Nonfarm Payrolls and inflation reports could carry significant weight on Fed expectations and, by extension, the US Dollar.

Such a dynamic helps explain why the US Dollar may have fallen sharply in the hours following a below-forecast US Consumer Price Index inflation data print on Friday. But more broadly, the fact that we are in the final weeks of the year tells us that lower liquidity may exacerbate short-term price swings. Caution is urged in what could be a choppy week of trading ahead.

Foreseeable event risk is likewise limited across major currency pairs, but traders should keep an eye on Japanese election results due Sunday, December 16 and a Bank of Japan interest rate decision on the 20th. The Japanese Yen itself is obviously the most likely currency to show strong moves following both events, but JPY weakness can likewise help explain why the Dow Jones FXCM Dollar Index has held onto key support near 9930.

As always, any distractions with the US Fiscal Cliff negotiations could affect financial markets. Yet if history is any guide, we expect politicians to wait until the very last minute to announce any sort of deal on tax and spending cuts.

Uncertainty surrounding financial markets has been an important theme through 2012, and recent trends suggest we may finish much as we began—with many more questions than answers. We will look to trade defensively into the end of the year and avoid getting caught up in sharp intraday volatility. – DR

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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14 December 2012 23:15 GMT