Fundamental Outlook for US Dollar: Bearish

- US dollar plummeted with 10-year Treasury yields after the Fed slashed rates to 0.0% - 0.25%, suggested quantitative easing
- The outlook for banks remains bleak as S&P downgraded the credit ratings of 12 financial institutions
- The White House stepped in to create a $17.4B bailout for GM, Chrysler with TARP funding

The US dollar has many fundamental reasons to pull back, including: the White House’s auto bailout that may help to boost risk sentiment, the Federal Reserve’s aggressive rate cut last week, and the prospect of quantitative easing that could drive long-term interest rates lower. However, over the next week, the big question is: what sort of price action will we see? With the Christmas holiday looming on December 25, many of the world’s financial markets will close and trading volumes will fall dramatically. Thin markets have a tendency to result in either very choppy or very quiet price action. Given the volatility seen recently, there’s a greater risk that these sorts of trends will continue, but they may ultimately leave the US dollar consolidating above its recent lows within wide ranges.

Data wise, the final round of US GDP readings for the third quarter is not expected to show any revisions upon release at 8:30 ET on December 23. Indeed, annualized GDP is forecasted to go unchanged at -0.5 percent, while personal consumption is expected to hold at -3.7 percent. It will likely take a surprisingly low result to illicit any sort of reaction from the markets, as traders are already well aware that economic conditions in the US remain dismal. Meanwhile, economic releases due out at 8:30 ET on December 24 are likely to be broadly disappointing and add to indications that the US recession only worsened during Q4. Indeed, personal spending in the US is forecasted to have fallen negative for the fifth straight month in November at a rate of -0.7 percent, while durable goods orders are expected to have dropped 3.0 percent, marking the fourth straight month that demand has either stagnated or declined.

Terri Belkas is a Currency Strategist at FXCM.