Fundamental Outlook for US Dollar: Neutral

- US Dollar mixed ahead of holiday weekend
- FX Options and Futures-based forecasts generally favor US Dollar declines
- Forex trading crowd sentiment shows early sign of potential US Dollar reversal

The US Dollar finished the week noticeably lower against the Australian, New Zealand, and Canadian Dollars as a broad improvement in financial market risk appetite sent the safe haven currency lower against risk-friendly counterparts. An apparent wave of optimism and/or complacency left the US S&P 500 over 4 percent higher on the week for the first time since October of last year. The relative absence of noteworthy economic developments suggests that the S&P’s sharp gains may be little more than a correction following two weeks noteworthy declines. As such, it will be critical to monitor short-term moves ahead of important Retail Sales and inflation data in the week ahead.

US financial markets have seen intensely choppy price action as of late, and it may take a strong shift in market sentiment to break the US Dollar out of its relatively tight two-week ranges against key counterparts. That said, the month of July is not known for intense currency market volatility and we may very well see the US Dollar stick to a small ranges through the foreseeable future. The wildcard remains whether we can expect the S&P 500 and other barometers see the same sharp price moves as we saw just two weeks ago. The S&P Volatility Index (VIX) hit fresh two-month highs on July 1 as the equity index saw considerable declines, but a subsequent calm across financial markets leaves the index near its lowest since early May.

Attention now shifts to the coming week’s Advance Retail Sales and Consumer Price Index reports. The former may especially elicit strong moves out of US financial asset classes on any large surprises. Given relatively lackluster US employment results, economists predict that the key metric of consumer demand fell 0.3 percent in the month of June. Overall consumer spending accounts for approximately two-thirds of US GDP, and a recovery in overall consumption is virtually a prerequisite to a lasting economic recovery. It suffices to say that any especially large surprises could force significant moves in the S&P 500 and, by extension, the US Dollar itself.

Inflation watchers will monitor any especially strong shifts in later-week Consumer Price Index data, but it may take an especially large surprise to elicit appreciable reactions out of currencies. Markets very widely expect that inflation pressures will remain subdued and the US Federal Reserve will subsequently keep interest rates at record-lows through the foreseeable future. Unless we see signs to the contrary, there is little reason to disagree with such an assessment.

The US Dollar remains in a somewhat uncomfortable position. Sharp choppiness in risky asset classes makes it very difficult to anticipate safe-haven demand for said currency. Lackluster economic fundamentals likewise suggest that markets see little reason to bid the Greenback higher otherwise. The US currency remains at the whims of broader financial and economic developments, and the coming week will likely only reinforce said fact.

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