US Dollar Fundamentally Moored Until Fed or Fear Decides Its Fate
Fundamental Forecast for Dollar: Bullish
- November NFPs haven’t steered the Fed off course for a rate hike before year end though the ECB reaction alters the view
- Anticipation for the December 16 FOMC meeting will curb trend development but not dampen volatility
- See how retail traders are positioning in the majors in your charts using the FXCM SSI snapshot
A lot has changed for the Dollar this past week. Technically speaking, the Greenback has tumbled from its 12-year highs and now finds itself in a comfortable range. Proximity to critical highs or lows creates tension and can subsequently spur speculative runs for trend development. Fundamentally, the ECB decision and NFPs have wrung some tension from positioning. And, while the week ahead carries more than its fair share of important event risk, the systemically important catalysts are further out on the horizon. These circumstances will shape trading conditions for the Dollar and the broader financial markets. Anxiety will support volatility, but fostering trends will be far more difficult. Active traders should adapt to the environment while investors (longer term) should mark the change in tempo for the currency’s monetary policy advantage post-ECB and pre-FOMC.
Market conditions represent a separate analysis type in my book, but it has ties to traditional fundamentals and technicals. For the Dollar, the speculative focus on particular underlying themes and the gap between updates capable of tapping these currents will rob the market of conviction in most efforts at trend development. That won’t necessarily quiet volatility however. In fact, the combination of seasonally and structurally thinned liquidity (due to complacency and crowded exposure) will leverage event risk to create more frequent and tempestuous market swings.
Top scheduled event risk in the week ahead will be those items that feed speculation surrounding the Fed’s intentions. This past week’s labor report did little to offer a definitive view with payrolls beating consensus modestly, the jobless rate holding at 5.0 percent and wage growth pulling back to a 2.3 percent clip. Ahead, we have an array of sentiment surveys (for consumers, businesses and the economy), inflation reports (import and producer) and the final planned Fed speech with hawk Bullard before the official pre-FOMC blackout. The US economic surprise index from Citibank shows conditions have dropped precipitously these past three weeks, but that hasn’t seemed to shaken the now-robust belief that the central bank is on pace to hike on Wednesday, December 16. Fed Funds futures are pricing in a 79 percent probability of ‘liftoff’.
Eliciting a trend from the Dollar this week would require a fundamental push that redefines or overrides focus on the impending Fed decision. Few motivators have the clout, but ‘risk trends’ is one of them. Sentiment is just as sensitive to the whiles of extraordinary monetary policy, but fear and greed do not need constant tending to run. Given the strained liquidity conditions and bloated positioning, triggering a speculative move may be much easier than many are prepared for. Panic is a stronger emotion than euphoria, so a wary eye should be kept out for ‘risk aversion’. Strong deleveraging from risky assets in a shallow liquidity world can readily escalate into the kind of flight to safety that revives the Dollar’s haven appeal.
On balance, Dollar traders should expect the focus to be cast forward to next Wednesday’s FOMC rate decision. That will stymie trend developed through productive relative-monetary-policy channels, but it is unlikely to rein in volatility and it isn’t a strong enough buffer to stop a committed risk move.
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