Fundamental Outlook for US Dollar: Bullish

- US Dollar rallies against Euro on sovereign debt crises in the Euro Zone
- Euro nonetheless stages recovery as US Dollar falls amidst stock market strength

The US Dollar finished the week lower against the Euro and other major forex counterparts, shedding early-week gains on a relative calm in ongoing Euro Zone fiscal crises. The Greenback had originally hit fresh multi-month highs against the downtrodden Euro as major rating agencies downgraded long-term sovereign credit ratings on both Spain and Portugal. Yet official announcements on further budget cuts and financial aid to Greece helped calm tumultuous FX markets. Market attention now turns to the upcoming week of critical US event risk, and the next several days of trading may very well dictate more medium-term direction in the US Dollar and other major currency counterparts.

A late-week US Nonfarm Payrolls report will likely dominate headlines in the coming week, but traders should likewise monitor any and all developments in earlier event risk. Indeed, the usual battery of pre-NFP releases should give a much better sense of what to expect from the highly market-moving US employment report. First on the ledger, analysts forecast that the ISM Manufacturing report showed robust growth in goods-producing sectors through the month of April. Any surprises in said number could color expectations for historically market-moving ISM Services data due just two days later.

Wednesday’s ADP Employment and Challenger Job Cuts data could likewise color forecasts for what promises to be a contentious NFP release. A poll by Bloomberg News shows that economists predict the US economy added a net 75k to 300k jobs in April with a median prediction of a 200k gain. The large spread between the low and high estimate truly underlines the indecision surrounding the release and will likely make any surprises that much more significant. Substantial hiring for the 2010 US Census should theoretically leave risks to the topside, but NFP results are notoriously difficult to predict.

US Dollar bulls should hope that the economy added jobs for a second consecutive month, and it would be the first such occurrence since December, 2007. With so much riding on the release, any especially large surprises could easily set the tone for US Dollar trading in the days to follow. Traders will certainly wonder whether the all-important US labor market has truly turned the corner and if consumer spending can recover through the second quarter.
Recent upward momentum leaves the US Dollar at an advantage over the Euro and other majors, but the wildcard remains whether markets see resolution in ongoing Euro Zone fiscal crises. Some have claimed that the EURUSD rallied into Friday’s close in expectation that the European Monetary Union and International Monetary Fund will announce a bailout for Greece over the weekend. That is a possibility, but if true would suggest that the US Dollar stands to gain on inaction. It should be an interesting start to what promises to be a similarly eventful week of forex trading.

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