Dollar: What Will It Take to Recharge Momentum in the Coming Week?Dollar: What Will It Take to Recharge Momentum in the Coming Week?

Fundamental Forecast for Dollar: Bullish

  • This week’s wage expectations in the consumer sentiment survey and Friday’s PCE will build on last week’s CPI update
  • With markets pricing in little chance of a second Fed hike, the Dollar’s buoyancy should set the rules for data ‘surprises’
  • See our 1Q 2016 forecast for the US Dollar in our Trading Guides page

A retreat through Friday left the USDollar with limited gains on the week. Nevertheless, the Greenback will head into the new trading week with tangible gains against the Euro and Pound – two of its most liquid counterparts. To revive momentum behind the currency waylaid by nearly 10 months of congestion we need clarity on a key theme. Though the Dollar is still imbued with the characteristics of a last resort safe haven, that role isn’t revived until we hit extreme levels of risk aversion. Short of such that speculative degree, sentiment will be a slow but persistent burden. The ready and prevailing fundamentals winds will once again reside in rate speculation.

Through this past week, interest rate expectations have shown a little resurgence – though emphasis needs to be on ‘a little’. Fed Fund futures lifted the implied probability of a hike in six months from zero to 24 percent and the two-year Treasury yield advanced from four-month lows. Meanwhile, overnight swaps are still not showing the follow up to December’s liftoff over the coming year. And, the contrast to the FOMC’s forecast from that meeting (100 basis points - or 4 standard hikes - in 2016) is exceptionally large regardless of what market metric we use. In the convergence of these views, we are likely to find the Dollar’s next move.

The fundamental updates through the past week that speak to rate speculation trimmed both the market’s exaggerated pessimism and the FOMC’s inflated optimism. Taking the top off hawkish ambitions, we had a well-known hawk (San Francisco President John Williams) notably soften his tone and the FOMC minutes reinforce concerns. A trimmed view of inflation pressure from the group’s evaluation takes the most productive wind out of the sails of the tightening bias, but it was the reiteration of global concerns that look more like appeasement for investors that are over-exposed on the market.

Alternatively, the January consumer inflation report (CPI) is slowly shoring up the most unstable corner of the central bank’s mandate. While the headline reading only ticked higher on an annual basis to 1.4 percent, the core figure would also nudge up to 2.2 percent – further above the 2.0 percent target. These figures increasingly highlight commodity prices as the limiting factor for this facet of policy making. That group also happens to be incredibly volatile, meaning they could rise much faster than policy officials usually act.

Establishing a firm read on the forecast of price pressures ahead will be key for Fed official and Dollar traders alike. Through the coming week, there are a few important statistics to mark. The Conference Board’s US consumer confidence survey offers up a wage expectations component which is about as close to the virtuous wellspring of inflation that we can come. There are also measures of employment, inflation and economic forecasts worth keeping tabs on. Friday’s PCE deflator will carry more of an air of authority though. The Fed’s favored inflation gauge is still well below pace on both a headline and core basis.

Outside of the influence of Fed timing, Dollar traders should also keep track of the other major central banks as well as the G-20 meeting Thursday and Friday. ECB officials have threatened to escalate their accommodative effort while the BoJ is seen as being pressured to upgrade as its currency gains and economy stumbles. China and the PBoC are unpredictable but cracks are showing again in their effort at control. As for the G-20, it is one of the few outlets to answer the major concerns listed by world authorities.

Dollar: What Will It Take to Recharge Momentum in the Coming Week?