Fundamental Outlook for US Dollar: Bullish

- US government intervention efforts continue as President Obama announced a housing recovery plan
- The Federal Reserve started to issue long-range economic forecasts with their monthly meeting minutes
- US CPI fell less than expected in January, but at 0%, deflation risks linger

The US dollar ended the week mostly higher, despite big losses on Friday, as the DXY Index pulled back from resistance at the 2008 highs. The outlook for the greenback for the next few weeks may hinge upon whether or not the drop signals a reversal or ultimately yields a break higher. Looking ahead to this coming week, there will be a handful of events that US dollar traders will need to watch as increased volatility could trigger sharp moves in the currency.

On February 24 at 10:00 ET, the Conference Board’s consumer confidence index for the month of February is forecasted to reach a fresh record low of 36.0, down from 37.7. With record keeping having begun in 1967, the plunge in sentiment makes the extent of the recession even more clear. However, with Federal Reserve Chairman Ben Bernanke due to testify before the Senate on the economic and Fed policy at the same time, the consumer confidence result may have little impact on the markets. Instead, traders will be listening closely for more detailed outlooks on growth, unemployment, inflation, and the financial markets. Bearish commentary could weigh heavily on risk appetite, and as a result it will be important to keep an eye on the link between the currency markets and stocks, as the US dollar hasn’t been responding as strongly to shifts in equities but could still benefit from flight-to-quality.

On February 26 at 8:30 ET, signs that domestic demand is showing no sign of recovery should continue to emerge as US Durable Goods Orders are forecasted to have dropped 2.3 percent and even excluding transportation is anticipated to fall 2.0 percent. All told, this would mark the sixth straight month in which the headline reading failed to rise, and while this will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment.

Finally, on February 27 at 08:30 ET, the preliminary reading of Q4 GDP for the US is forecasted to be revised even lower after initial estimates showed the index down 3.5 percent. The latest results may show a sharp 5.4 percent contraction, which would still be the worst since Q1 1982. The National Bureau of Economic Research (NBER) has already declared that the US has been in recession since December 2007, but a plunge in GDP in line with expectations will only suggest that the contraction in growth will continue to be worse than previously expected.

Jamie Saettele is a Technical Currency Analyst for FXCM.