Fundamental Outlook for US Dollar: Bearish

- ISM Manufacturing slipped below 50, signaling a contraction in business activity
- ISM Services unexpectedly improved in August, signaling expansion for the first time since May.
- US non-farm payrolls (NFPs) fell more than expected by 84K, unemployment rate jumped to 5-year high of 6.1%

The US dollar faces substantial event risk, but this week is a bit different from others as the release of economic indicators may prove to be rather unimportant. Instead, the greatest threat to the US dollar is the fate of Fannie Mae and Freddie Mac. Shares of the two mortgage giants plummeted after Friday’s stock market close amidst speculation that the US Treasury will announce plans to inject capital over the weekend. If this is indeed the case, the news could trigger a bout of flight-to-safety, sending Treasuries higher and the US dollar, stocks lower, and the Japanese yen crosses down (like the Bear Stearns announcement back on Sunday, March 16). Clearly this will be an event worth watching.

Regarding the standard economic releases on hand, US pending home sales are anticipated to slip as demand for properties remains weak. Meanwhile, the trade balance for the month of July is likely to reflect a wider deficit, as oil prices were still high during that period and may inflate the import figure. On the other hand, the plunge in commodities during August may help lead producer price growth to slow on Friday, as raw material costs drop. Also at the end of the week we’ll have advance retail sales and University of Michigan consumer confidence, both of which are anticipated to show mild increases thanks to falling gasoline prices. Overall, though, there are downside risks for these reports as well given the dismal status of the US labor markets.

Antonio Sousa is a Currency Analyst for FXCM.