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US Dollar Rally Might Run out of Steam Unless this Changes

US Dollar Rally Might Run out of Steam Unless this Changes

David Rodriguez, Head of Product

Fundamental Forecast for Dollar:Neutral

The US Dollar finally showed signs of life as a surprisingly-upbeat Federal Reserve sent it sharply higher versus major counterparts. Yet key headwinds remain, and a number of factors suggest that buying USD makes little sense at these levels.

The US Federal Open Market Committee (FOMC) had a lot to say about current economic conditions and matched market expectations as they announced a further “Taper” of their Quantitative Easing policy. Yet it was a noteworthy shift in interest rate forecasts that really sent the Dollar higher, and indeed market correlations suggest yields may remain the most important USD driver through the foreseeable future.

Traders showed little hesitation post-FOMC and sent the 2-year US Treasury Note yield to its largest single-day advance since it set its modern-day low nearly four years ago. And yet the lack of follow-through the rest of the week left the US currency vulnerable. Indeed, the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) failed at late-February highs as Treasury markets stabilized into end-of-week trading. What’s next?

An effectively empty US economic calendar in the days ahead gives little reason to expect major shifts in interest rate expectations or the US Dollar itself. In fact, forex volatility prices now trade near their lowest levels since the onset of the global financial crisis in 2007. Muted forecasts give little reason to expect that the Greenback will trade significantly higher through the foreseeable future.

Thus traders should be wary of buying the US Dollar as it trades near important technical resistance versus the Euro, British Pound, and other counterparts. A substantial shift in market conditions—particularly in highly-correlated US Treasury markets—could obviously change our stance on the Greenback. As traders we’re forced to think in terms of probabilities; current evidence tells us to expect few major moves through the final week of March. – DR

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