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The Case for a Short-term US Dollar Rally Improves

The Case for a Short-term US Dollar Rally Improves

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- EUR/USD plagued by overzealous rates pricing for Fed, ECB.

- Bar raised for ECB action in March.

- As market volatility rises, it's a good time to review the "Traits of Successful Traders" series.

We've been very cautious - even outright bearish - on the USDOLLAR Index, but it's time to consider the opposite point of view. Rates markets on both sides of the pond may have gotten ahead of themselves, with a greater chance of a rate cut than a rate hike now being priced in for the next FOMC meeting in March.

With US economic data off to its worst start over the past 10 years (chart 1), there's really no where to go but up. A simple stabilization in the data, rather than an outright improvement, could dispell growing fears of a looming recession risk in H2'16. In turn, the repricing of even one rate hike in the first half of this year - as a reminder there are zero currently priced in for 2016 whatseover - would be a tailwind for the greenback.

See the above video for an expanded conversation on the fundamentals underpinning the US Dollar's outlook through the end of Q1'16 and for technical considerations in EUR/USD, AUD/USD, USD/JPY, GBP/USD, and the USDOLLAR Index.

Be sure to read the article below for an expanded discussion on the Euro's part of the equation.

Read more: Further Euro Strength Suspect as Data Deteriorates; ECB Very Likely to Act

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on the DailyFX Real Time News feed, Twitter, and Stocktwits at @CVecchioFX.

To be added to Christopher’s e-mail distribution list, please fill out this form.

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