Fundamental Outlook for US Dollar: Bullish

- Conference Board consumer confidence surprisingly surged to a 3-month high in August
- Despite revisions, the University of Michigan’s consumer confidence index fell slightly
- US durable goods orders jumped by the most in 2 years, but excluding autos, gains were muted

The US dollar ended the past week on a mixed note across the majors, losing against the New Zealand dollar, Australian dollar, and Japanese yen, but rising versus the Swiss franc, euro, Canadian dollar, and British pound. Ultimately, this amounted to little more than a continued period of consolidation, as the US dollar index remains above a rising trendline connecting the July 2008 and August 2009 lows. Nevertheless, trading conditions have been extremely difficult, even for those that thrive on range trading, as the low volumes so often associated with the “summer doldrums” create highly choppy price action, and this may remain the case throughout next week ahead of the US Labor Day holiday.

There are a number of indicators due out over the next week that could trigger breakouts for the US dollar. On Tuesday, the ISM manufacturing index is projected to rise above 50 – the point of neutrality – for the first time since January 2008, which would suggest that the sector is finally experiencing a legitimate recovery in business activity. Indeed, the US government’s “cash for clunkers” program has been a boon for the auto industry and for manufacturers in general, but since the program formally ended on August 24, there could be a noticeable drop in output in coming months. Regardless, a strong ISM manufacturing reading would bode well for the US dollar.

The main event risk for the US dollar on Wednesday will be the release of the minutes from the Federal Reserve’s last meeting on August 12. Following that meeting, the policy statement eventually led to a quick return to risk-taking that pushed the greenback lower, as the Federal Open Market Committee (FOMC) said that the current "policy actions…will contribute to a gradual resumption of sustainable economic growth" and that they had decided to gradually slow the pace of Treasury securities purchases. A reiteration of these statements has the potential to lift risk appetite further, but on the other hand, indications that FOMC members are feeling uneasy about the outlook for growth or the need to expand quantitative easing down the road could do quite the opposite.

On Thursday, ISM non-manufacturing is anticipated to rise to an 11-month high of 48.0 for the month of August from 46.4. While stronger readings are always a positive, anything below 50 will continue to signal a further contraction in activity and will ultimately highlight the lack of consumer spending growth in the US.

On Friday, the US non-farm payroll (NFP) report is forecasted to show job losses for the twentieth straight month in August, though the rate of decline is anticipated to slow further. Bloomberg News is currently calling for NFPs to decline by 227,000, which would be the smallest drop in a year. Meanwhile, the unemployment rate is projected to edge up to 9.5 percent from 9.4 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view.

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