Fundamental Outlook for US Dollar: Neutral

- US Dollar drops following GDP and FOMC results
- Real fireworks to come on US Non Farm Payrolls, ISM results
- Technicals show telling outlook – What is our US Dollar forecast?

The US Dollar’s multi-month uptrend was put to the test on yet another week of S&P 500 rallies, and the Greenback looks as though it may finally break through key technical support against the Euro and other key counterparts. A disappointing week for economic data only exacerbated the dollar’s woes; first quarter GDP results showed the biggest peak-to-trough economic contraction since 1958. The US Federal Reserve’s rate announcement was a surprising non-event, but market participants later punished the USD on continued promises for further fiscal and monetary stimuli to the US economy. Our short-term outlook has now turned bearish; it seems only a matter of time before the US dollar breaks key technical support against the euro and other major currencies.

The week ahead promises no shortage of economic event risk, and the infamous Non-farm Payrolls report virtually guarantees volatility through end-of-week trade. We will have the usual string of similarly important economic reports through the earlier week, and it will be important to watch whether the recent “second derivative” improvement in US economic data can be sustained. Economists have hailed the recent improvement in ISM Manufacturing data and other key reports as early signs economic recovery. Yet such hypotheses will be put to the test by the far-more-important ISM Non-Manufacturing report due Tuesday morning. Given that the Services sector comprises approximately three quarters of total US GDP, markets will heavily scrutinize any surprises in the data release. Recent ISM Manufacturing data pointed to a stabilization in consumption. Lack of confirmation via the ISM Services result would nonetheless jeopardize the recent upturn in economic sentiment, and any surprises in the closely-watched Employment index could likewise have a clear effect on NFP forecasts.

All eyes will subsequently turn to ADP Employment Change results and the all-important Non Farm Payrolls figures. Last month’s ADP data proved far worse than the official NFP result, but markets will nonetheless react to any especially large surprises out of the private employment survey. Smaller Challenger employment results and Wednesday’s Jobless Claims data will likewise provide a glimpse of relative labor strength—clarifying outlook for Friday’s NFP data. Of course, anyone who has been around FX markets long enough knows that it is virtually impossible to accurately predict NFP figures—much less anticipate the US Dollar’s reaction to the release. We will have to watch headline surprises in Friday’s NFP report and keep track of broader market reactions to the event. The US Dollar could counter-intuitively rally if a disappointment forces sizeable declines in the S&P 500 and other risky assets. It will otherwise remain important to gauge the trajectory of risky asset classes to guess subsequent direction in the safe-haven US currency.

John Kicklighter a Currency Strategist at FXCM.