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US_Dollar_Forecast_Turns_Bearish_on_Fed_Actions_SP_500_Rallies_body_TOF1105usd.gif, US Dollar Forecast Turns Bearish on Fed Actions, S&P 500 Rallies

US Dollar Forecast Turns Bearish on Fed Actions, S&P 500 Rallies

Fundamental Outlook for US Dollar: Bearish

The highly-anticipated Federal Open Market Committee interest rate announcement sent the US Dollar reeling against the Euro and other key currencies, and the sharp break suggests the Greenback may continue to drop through upcoming trade. For weeks now we have argued that the USD’s fate may depend on the FOMC’s subsequent actions. Fed officials certainly did not disappoint in announcing an aggressive second wave of Quantitative Easing, and the breadth of their actions stifled hopes of a sharp US Dollar recovery. The Greenback is likely to remain on the defensive in the week ahead as traders show little appetite to buy into aggressive dollar declines.

Consensus forecasts called for a fresh $500 billion in Fed asset purchases, and officials trumped expectations in announcing $600 billion in balance sheet expansion. It was perhaps little surprise to see the US Dollar fall on the larger-than-predicted sum of Quantitative Easing, and indeed the decision provides a strong headwind to the US Dollar through upcoming trade. The EURUSD break above previous highs now has our own technical strategist watching for a run towards 1.4500, and current momentum certainly points to fresh dollar declines.

We had previously called for an important US Dollar reversal on seemingly one-sided bearish sentiment and speculative positioning. Yet sentiment can and has remained extreme for extended periods of time, and we were clearly premature in our calls for USD strength. As it stands, bearish momentum and US Dollar fundamentals do not bode well for short-term trends. This is especially true in the face of strong rallies in the S&P 500 and broader financial market risk sentiment. It seems that the US Dollar has few things working in its favor, and it may in fact need to fall further before showing any real chance of important recovery.

A relatively empty week of US economic event risk leaves the currency at the whims of broader financial market volatility in the days ahead. It will clearly be important to watch whether the S&P and other ‘risk’ barometers can continue to fresh highs—especially as stocks hit their highest levels in two years. One wonders whether the Fed’s actions are enough to sustain such one-way rallies in the S&P 500 and declines in the US Dollar. As of this past week, markets show relatively little appetite to go against the trend amidst strong price momentum. - DR

How far do you think the dollar will rally? Discuss the dollar’s future in the DailyFX Forum.

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