Fundamental Outlook for US Dollar: Bearish

- US GDP results signal worst economic slowdown in 7 years
- US consumer spending and durable goods orders fall to record lows

The US dollar generally ended the week lower across the majors, but lacked the momentum to yield the breakouts expected amidst the low volume trading typical of US market holidays. On Friday during the European trading session, the greenback jumped but lackluster price action during the US session left the major currency pairs within well-defined ranges. In fact, EUR/USD has held firmly between 1.2425 and 1.3075 since late October, GBP/USD has not been able to break above 1.55 since falling below on November 11, and the USD/JPY remains below falling trendline resistance that has held since mid-October.

Looking ahead to this week, event risk will pick up quite a bit for the greenback. On Monday, ISM Manufacturing is forecasted to slip to a fresh 16-year low of 37.5 from 38.9, and would also mark the fourth straight month that the index held below 50, signaling a contraction in business activity. Manufacturers are facing increasingly rocky times in light of slowdowns in the US and abroad, which is impacting both domestic and foreign demand. On Wednesday, ISM Non-Manufacturing is forecasted to drop to a new record low of 42.0 from 44.4, which will only add to speculation that Q4 GDP will be just as disappointing as the Q3 results, if not more. Last, but not least, US non-farm payrolls on Friday are sure to garner significant attention from the media and traders alike as they are forecasted to fall negative for the 11th straight month and by the most since September 2001. Furthermore, the unemployment rate is anticipated to rise to 6.8 percent - the highest since August 1993 - from already lofty levels of 6.5 percent.

It is rather obvious that the markets are expecting a round of pretty disappointing releases, but the big question is: how will the US dollar respond? Last week, the US dollar generally responded to fundamentals reports by falling when data suggested the Federal Reserve would cut rates further. This differs from previous weeks when the greenback responded solely to risk trends, as the currency would rise during times of risk aversion and stock market declines and vice versa. As a result, gauging the impact of risk sentiment on the forex markets will be important at the start of next week since it may determine whether the US dollar will break higher or fall for a deeper retracement.

Terri Belkas is a Currency Strategist at FXCM.