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Dollar Breaks Higher but Will GDP and FOMC Forecasts Sustain It?

Dollar Breaks Higher but Will GDP and FOMC Forecasts Sustain It?

2016-04-23 02:35:00
John Kicklighter, Chief Currency Strategist
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Dollar Breaks Higher but Will GDP and FOMC Forecasts Sustain It?Dollar Breaks Higher but Will GDP and FOMC Forecasts Sustain It?

Fundamental Forecast for Dollar: Bullish

  • The FOMC rate decision is top event risk for the Dollar, but be prepared with the market’s certainty of no move
  • Dollar traders should keep an eye on the Euro’s bearings and the Yen’s reaction to the BoJ decision
  • See our 2Q forecasts for the US Dollar and market benchmarks on the DailyFX Trading Guides page

Finally, a bit of a reprieve for the USDollar. Having found itself under moderate but persistent pressure since its recent peak at the beginning of February, the Greenback finally managed a technical feat of strength. The Dollar Index managed to move above its 20-day moving average and break from the tight confines of its burdensome, bearish wedge to close out Friday. Yet, the fundamentals is where the doubt about the market’s intentions start to creep in. What was the motivation behind this move? Many technical traders claim it doesn’t matter, but to mount bullish follow through, something is needed to inspire bulls to the currency’s cause. The motivation looks to be lift from troubled counterparts. While that may sustain the Dollar for a brief time, it would be better supported to a lasting run if the source was intrinsic – like a definitive rise in Fed rate forecasts or meaningful upgrade in US growth bearings.

Looking back over this past week, it was not surprising to see the Dollar rise through the aggregate leverage of weakening counterparts. The declines recorded through its major peers were the result of a broadly different catalysts. EUR/USD slipped in earnest after the ECB backed off from its accommodative monetary policy press at this past Thursday’s meeting – they have little room to maneuver. While a smaller-than-expected stimulus increase led to a Euro rally, the end of the effort carries a more definitive tone. USD/JPY posted its largest single-day rally in nearly 18 months as lingering fear of BoJ or MoF intervention finally unnerved traders. And, the comm group (AUD, CAD and NZD) lost traction alongside the commodities they produce.

While further individual and aggregated losses from the major currencies can help lift the Dollar further, it would be a low probability situation; and the leverage from a single counterpart is unlikely to provide enough drive. That said, the cumulative momentum between the Euro and Yen specifically could earn a significant move. For the former, concern over what a faltering monetary policy effort and the next swell on the endless Greece debt crisis will matter more than the data. For the Yen, the BoJ is due to deliberate its own policy. The swell in Yen crosses comes amid concerns that the central bank could act at any moment to deliver short-term speculative traders losses through volatile intervention. If that intervention doesn’t materialize, the speculative tide may roll back in.

Form the Dollar’s own fundamental landscape, there are plenty of hills to draw trader’s interest; but only two particular items stand above the rest. The FOMC rate decision on Wednesday is not one where the market is holding its breath awaiting an imminent hike. In fact, the probability of a hike at this meeting according to Fed Fund futures and overnight swaps is essentially zero. While, the central bank is unlikely to act at this meeting, the probability is most certainly not zero. The ‘global risks’ concern has abated with market volatility, and the dual mandate factors continue to trend towards targets. If there is a hike, the Dollar will rally sharply. More likely, a hold will leave us with the monetary policy statement which the market will break down and assess how firmly it holds onto its skepticism. If they remain every-persistent about two hikes this year, the freeze against hawkish ambitions will lift.

There is no doubt that the 1Q GDP reading due Thursday will be capable of stoking serious volatility, but its influence may further prove more systemic. Relative growth and stability is increasingly important to the distribution of global funds. If the United States’ looks more robust, it will draw capital from faltering Eurozone and Japanese markets; while stability will encourage funds from China and the emerging markets. It should be mentioned that speculation for this data is very scattered. The Atlanta Fed’s forecast was 0.1 percent, the New Fed’s new forecast set it at 1.1 percent and the economists’ consensus is for 0.6 percent annualized growth.

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