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Mind the Forest, Not the Trees, for the US Dollar This Week

Mind the Forest, Not the Trees, for the US Dollar This Week

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Euro and Yen likely to move in same direction around NFPs.

- Retail crowd continues to fade recent US Dollar selloff.

- As market volatility rises, it's a good time to review risk management principles.

For the US Dollar, the key thing to watch for over the next week is...well, there really isn't one. While the economic calendar has events and data on it, they are not really of the exciting variety; nothing to the extent of the February Nonfarm Payrolls report, for example. For traders, this means that event-driven volatility is likely to be lower in the London-New York trading hours.

In turn, longer-term traders, particularly those operating in USD-pairs, may not find any single event, data speech, or speech all too that moving; but when viewed in aggregate, these seemingly unimportant comings and goings will actually help clarify the near-term outlook over the US economy.

Whereas market participants were thoroughly disappointed by US economic data in 2016 through the first six weeks of the year, the Citi Economic Surprise Index has shot higher in recent days (chart 1):

Chart 1: US Citi Economic Surprise Index – 10 year Seasonality

Citi Economic Surprise Index US Dollar March 7, 2016

The jump higher in the Citi Economic Surprise Index is coming alongside the FRB of Atlanta's GDPNow growth forecast is holding up at +2.2% for Q1'16. It seems market participants have come to terms with reality: they were expecting "great" data when all they got was "good," and data recently has been of this 'goldilocks' variety.

Should these data in aggregate continue to support a rise in near-term data performance relative to expectations, the greenback may see rate expectations firm further - which should help insulate it around the March 16 FOMC. For now, rates markets have all but priced out the possibility of a hike next week, with only a mere 8% chance of a 25-bps hike being priced in for March, according to the Fed funds futures contract: The first hike is now being priced in for September 2016, the only hike eyed this year:

Table 1: Fed Funds Futures Contract Implied Probabilities: March 7, 2016

Fed funds futures contract

Meanwhile, risk markets continue to perk up, led by Crude Oil and Gold. If you missed our report last week, you should read the March 3 article, "Don’t Look Now - Risk Markets are Trying to Stage a Comeback."

See the above video for technical considerations in EUR/USD, AUD/USD, Gold, Crude Oil, EUR/CAD, GBP/CAD, and the USDOLLAR Index.

Read more: Euro Unlikely to Stay Lower Unless ECB Meeting Yields Big Bazooka

--- Written by Christopher Vecchio, Currency Strategist

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