Fundamental Outlook for US Dollar: Bullish

- US Dollar hits fresh highs against Euro on Greek worries, but it wasn’t to last
- Fed’s Bernanke sets a relatively hawkish tone, setting stage for US dollar gains
- FX Options sentiment shows US Dollar could continue rally, but short-term critical

The US Dollar finished the week as the top-performing G10 currency, staging a noteworthy rally against the Euro, Japanese Yen, and other key counterparts. Impressive gains had seemingly less to do with economic data and more with impressive trader demand. Many were left looking for reasons that the Greenback would rise so sharply against the Japanese Yen, but concrete reasons were difficult to find. Of course, price action against the Euro was far more eventful given the ongoing Greek Fiscal Crisis and European Union bailout. Despite sharp declines, the EURUSD showed noteworthy reversal through Friday’s close. The critical question going forward will be whether we can expect similarly eventful price action in the week ahead. Upcoming US Nonfarm Payrolls data promises a great deal of volatility across USD pairs, and results may give further clues as to the medium-term trajectory for the US Dollar. Consensus forecasts call for the second net-gain in jobs since December, 2007, and optimism is clearly riding high ahead of the report. Preliminary US Corporate Profits data for Q4, 2009 data showed that profitability increased an impressive 30 percent on the year on the heels of impressive productivity gains. Economists subsequently estimate that companies will resume hiring as profit margins return to normal, but there obviously remains ample room for disappointment. It will be critical to watch whether the US economy added jobs in any significant fashion and, more importantly for FX markets, reactions from the US Dollar.

Of course markets will have to wait until Friday for said NFP data, and a great deal of things can happen between now and then. In terms of concrete economic event risk, traders should keep a close eye on Personal Income and Spending data due Monday, Consumer Confidence on Tuesday, ADP Private Employment data on Wednesday, and ISM Manufacturing figures on Thursday. Any one of these reports could force sharp reactions from US financial markets and the domestic currency. Somewhat-lofty expectations across the board leave the US Dollar at key risk of pullback on any especially large disappointments.

At the risk of sounding repetitive, the US Dollar remains at a crossroads against the Euro and other key counterparts. Whether or not this past week’s advance is the start of a much bigger rally will depend on a great number of factors—not least of which is the stacked economic calendar. The Euro/US Dollar’s breakdown initially gave reason to believe that the Greenback could continue higher (EURUSD lower). Yet EURUSD bears, including this author, were left in the lurch when the pair quickly reversed course. The case for medium-term Euro/US Dollar declines may very well depend on the coming week of trading.

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