These Key Events Could Force the US Dollar Significantly Higher
Fundamental Forecast for US Dollar: Bullish
- Dow Jones FXCM USDOLLAR Index finishes near highs ahead of critical week
- Next week promises major volatility on FIVE major central bank interest rate announcements
- Upcoming US Nonfarm Payrolls data promises fireworks ahead of US Fed meeting
- Trade the US Dollar’s moves via our currency baskets on Mirror Trader
The Dow Jones FXCM Dollar Index finished the month of August almost exactly where it started, but a critical week for forex markets almost guarantees that the Greenback will see much larger moves in days and weeks ahead.
It will be an alphabet soup of top-tier economic event risk across the globe as the Reserve Bank of Australia (RBA), Bank of Canada (BoC) Bank of Japan (BoJ), Bank of England (BoE), and European Central Bank (ECB) will announce interest rates and policy within the span of four days.
It may nonetheless be the US calendar to force the largest financial market moves with Friday’s critical US Nonfarm Payrolls (NFPs) report to set the stage for the all-important US Federal Open Market Committee (FOMC) policy announcement on September 18.
The median Bloomberg forecast for NFP’s predicts the US economy added 180k jobs in August and the national unemployment rate remained almost exactly unchanged at 7.4 percent—hardly a recipe for volatility. But the tight cluster of analyst estimates suggests that any significantly above or below-forecast Unemployment results could force big US Dollar moves. Why does it matter so much?
It all boils down to one question: when will the US Federal Reserve “taper” its aggressive Quantitative Easing policies and by how much? A strong upward revision to US economic growth estimates and sharp rises in US Treasury Bond/Note yields suggest the so-called “Septaper” is on track. But price action around major economic events has been erratic, and a big NFP disappointment could derail the nascent US Dollar recovery.
With that in mind we’ll look to the usual slew of pre-Nonfarm Payrolls data releases to guide expectations: US ISMManufacturing and Services, ADP Employment Change, and Initial Jobless Claims results may guide price action heading into Friday’s report.
Last week we wrote of two critical factors on why the US Dollar couldn’t hold its gains: low forex volatility and extremely one-sided sentiment.
On the sentiment front, our proprietary retail FX positioning data supports calls for Dollar strength. As far as volatility goes, a recent surge in forex volatility prices tells us what we already know: next week will be huge.
Geopolitical tensions surrounding Syria might also force short-term volatility, but market reactions to recent developments have been somewhat muted. We don’t think this will be a major theme across FX markets.
Is this the major turning point for the US currency? Forex seasonality studies show that currencies tend to make major highs/lows at the beginning and end of each period. The beginning of the new week, month, and quarter could very well bring the major USD breakout we’ve awaited. - DR
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