Fundamental Outlook for US Dollar: Bearish

- ISM non-manufacturing held below 50 for the 4th straight month, signaling a contraction in activity
- US personal spending fell for the 6th straight month amidst slipping incomes
- US non-farm payrolls fell by 598,000 in January, the most since 1971

The US dollar ended the past week down versus most of the major currencies as a surge in risk appetite weighed on low-yielders, including the Swiss franc and Japanese yen. For what it’s worth though, the dollar index hasn’t done much but consolidate below its January highs, and it will take a large shift in risk trends to get the greenback to break higher or lower. With event risk due to be fairly high this week, such a break seems possible.

On Tuesday, Federal Reserve Chairman Ben Bernanke is scheduled to testify in front of the House Financial Services Committee on the central bank’s lending programs at 13:00 ET, and this could prove to be one of the biggest market-movers of the week due to its potential impact on risk sentiment. Part of this will probably include explanations as to why the Federal Reserve announced on Friday that they would delay plans to start lending under a $200 billion program called the Term Asset-Backed Securities Lending Facility (TALF). TALF will allow the central bank to lend to holders of AAA rated debt backed by newly and recently originated loans, including education, car, credit-card loans, and loans guaranteed by the Small Business Administration. Overall, though, if Chairman Bernanke is bearish on prospects for the financial markets and global economy, his comments could have very negative repercussions for the stock markets, and we could see flight-to-quality spark demand for Treasuries, the US dollar, and Japanese yen. On the other hand, if he manages to inspire confidence that conditions will not get significantly worse, risky assets could rally.

On Thursday, the Commerce Department is forecasted to report that US retail sales fell negative for the seventh straight month in January, as even the most aggressive discounting wasn’t able to offset the impact of a deteriorating labor market, tighter credit conditions, and a year-long recession. More specifically, advance retail sales are anticipated to have contracted 0.8 percent during the month, and excluding auto sales are expected to have slumped 0.4 percent, initiating what may end up being a consistent trend through the first half of 2009 as well. As we saw with US non-farm payrolls, the impact of a disappointing result may be limited, as the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent and has no room to cut further.

Jamie Saettele is a Technical Currency Analyst for FXCM.