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US Dollar Rally at Clear Risk as Key Events May Disappoint

Fundamental Forecast for Dollar:Neutral

The US Dollar rally showed signs of slowing as the DJ FXCM Dollar Index failed to hold multi-month highs. Traders look to a critical European Central Bank decision and US Nonfarm Payrolls report to decide direction in Dollar pairs through the week ahead.

Dollar gains could reverse as our Senior Strategist notes it is coming on an important cyclical turning window. And indeed, the Dollar has arguably lost a key source of support as US Government Bond yields tumble—limiting the appeal of betting on further Greenback gains.

It would be fitting if such a USD pullback occurred on the highly-anticipated ECB decision or the US NFPs labor data. What out of either event could realistically force the Greenback lower?

The weight of expectations threatens to push the US Dollar further off of recent peaks versus key counterparts. Bloomberg News surveys show that most expect the European Central Bank to cut interest rates, which has in turn helped push the Dollar higher versus the Euro. Yet any disappointment could easily force the Euro/USD exchange rate further off of multi-month lows.

Consensus forecasts for US NFPs employment figures paint a similarly optimistic picture for the US currency. Bloomberg News survey results predict the economy added 220k jobs in the month of May as the Unemployment rate stuck near multi-year lows. This would represent the fourth-consecutive month of at least 200k net jobs, and optimistic expectations leave ample room for disappointment.

Of course the ECB and NFPs could match market expectations and keep the Dollar rally alive. Yet it’s worth noting recent futures positioning data showed large speculators at their most bullish USD versus the Euro since the EURUSD set a key low in July, and positioning is likewise growing stretched in our retail trader sample.

In other words: beware of the potential for a short-term sentiment and price extreme across major US Dollar pairs. – DR