Fundamental Outlook for US Dollar: Bullish

- US Dollar may have set an important bottom against the Euro
- US Unemployment Rate hits 26-year high on NFPs disappointment
- US ISM Non-Manufacturing key barometer on domestic economic activity

The US Dollar finished the week higher against the Euro and other key counterparts, but a sharply disappointing Nonfarm Payrolls report nearly derailed the nascent Greenback recovery through Friday’s close. The trade-weighted US Dollar Index hit fresh monthly highs near 77.50 just ahead of the release. Immediate declines in the US S&P 500 initially sent the dollar higher, but markets clearly expressed their displeasure with the worse-than-expected payrolls release and sold USD through in subsequent trading. Sudden USD losses complicate our otherwise bullish near-term Dollar forecast, but we continue to forecast further Greenback recovery through near-term trade. Comparatively limited event risk in the days ahead has left volatility expectations lower, but flare-ups in financial market tensions could nonetheless force major moves across USD currency pairs.

Earlier in the week we argued that the US Dollar set an important bottom against the Euro on fairly clear sentiment extremes. US CFTC Commitment of Traders data shows that Non-Commercial traders—a group mostly comprised of hedge funds and other large speculators—remained the most net-long the Euro/US Dollar since it traded near 1.6000 in early 2008. Though sentiment can and does remain extreme for extended periods of time, early signs of EURUSD reversal support our calls for a broader US Dollar reversal. Strong correlations between the US Dollar and key risky asset classes nonetheless leave the currency at the throes of the recent upheaval in the S&P 500. It will subsequently be critical to watch for any signs that the recent equity market tumble is the start of a larger decline.

US Dollar traders should almost certainly keep an eye out for abrupt shifts in risk sentiment, but a relatively empty US economic calendar leaves limited scope for major day-to-day shifts. The notable exception is Monday’s US ISM Non-Manufacturing report, which will shed further light on the state of the domestic services industry. According to 2008 estimates, the Services industry accounts for nearly 80 percent of US GDP. Suffice it to say, any noteworthy surprises in the highly-anticipated report could force major moves in the US Dollar and broader financial markets. Indeed, the ISM Non-Manufacturing survey tends to be one of the most market-moving events on release.

Outside of the ISM report, forex traders should keep a look out for a number of important global central bank interest rate decisions. Uncertainty surrounding Australian, British, and European central bank announcements may make for an interesting run of days across key forex pairs. It is near-impossible to predict how markets to react to any of these important announcements, and as such traders should be sure to control risk on open US Dollar positions.

We have seen early signs of a sustained US Dollar reversal. Yet very recent price action has shown markets were not yet willing to push the Greenback materially higher versus key counterparts. The coming week may prove especially important to overall trends in major US Dollar pairs.

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