Fundamental Outlook for US Dollar: Bullish

- Safe-haven US Dollar pulls back with improved signs of global growth
- Short-term US Dollar forecast dims on one-sided options sentiment
- Key data to force a surge in US Dollar trading volume

The US dollar finished marginally lower against key forex counterparts through an uneventful week of trade, and markets now look to the coming week’s critical economic data to determine broader direction for the US currency. A nearly-empty economic calendar gave little reason to force major US dollar moves through the past week’s trade; instead it seemed illiquid market conditions fueled unexpectedly sharp intraday moves in the US currency. Exceptions included Thursday’s positive Initial Jobless Claims result and the prior day’s impressive Chicago PMI data—setting expectations high for the coming week of critical economic event risk. Given a fairly steady string of positive economic surprises, markets may punish the resurgent US Dollar if any of the coming week’s key releases disappoint. The weight of expectations may indeed leave short-term US Dollar risks to the downside after the past month of impressive gains.

The infamous US Nonfarm Payrolls report headlines a busy week of economic event risk and sets the stage for strong US Dollar volatility in the days ahead. The first dose of event-driven volatility will likely come on Monday’s US ISM Manufacturing data—historically one of the most market-moving events across the forex market. This past week’s Chicago PMI data came in considerably better than consensus forecasts and sets similarly lofty expectations ahead of the ISM release. It may be especially important to watch for shifts in the ISM Manufacturing employment index ahead of the later-week Nonfarm Payrolls report.

The following days will see the release of potentially significant Pending Home Sales and ADP Employment Change reports. The former is likely to show that pending sales of existing homes pulled back after nine consecutive months of gains, but volatile housing data is notoriously difficult to predict. As such, watch for any surprises and commensurate moves in the US Dollar and other key markets. Subsequent ADP Employment change figures will ostensibly give us a better idea on what to expect for Friday’s NFP numbers and may indeed be one of the most market-moving releases of the week.

Finally, the US Nonfarm Payrolls report is expected to show that employers neither added nor shed jobs through the month of December—what would be the best result since December, 2007. US Dollar risks likely remain to the downside ahead of the data release, however; material disappointments could negate the bullish trend in US employment data. Traders will need to keep a close eye on these key reports and their effect on broader Greenback trends. We have made little secret of the fact that we expect the US Dollar to continue to recover against the Euro through 2010, but fast shifts in Forex Futures and Options market sentiment suggest that the short-term may produce further pullbacks. The coming week should provide a good deal of clarification and make or break the short-tem USD resurgence.

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