Fundamental Outlook for US Dollar: Bullish

- US Dollar starts the week strong as Dow Jones tumbles push it to highs vs. Euro
- Subsequent rebound in US S&P 500 weighs on the US Dollar
- View our monthly Euro/US Dollar Exchange Rate Forecast

The US Dollar traded slightly higher against major forex counterparts in an uneventful week of trading, showing little impetus to break important support or resistance levels on similarly lackluster price action across broader financial markets. A pickup in US economic event risk promises stronger volatility in the week ahead, however, and it seems only a matter of time before currency pairs break out of narrow ranges. Relatively steady gains in the US S&P 500 and a multi-month downtrend in the US Dollar suggest that risks remain to the downside. Yet a fragile recovery in financial market risk sentiment could just as easily falter and send the safe-haven USD higher against the Euro and other currencies.

Calendar highlights in the week ahead include an often market-moving Advance Retail Sales report, Industrial Production numbers, Consumer and Producer Price Index inflation results, and University of Michigan Consumer Confidence survey data. The Retail Sales release may be especially contentious given its strong influence on the US S&P 500 and broader risk sentiment; recent fears of faltering US economic recovery could make disappointments especially market-moving. CPI and PPI data could likewise influence market expectations on the future of US Federal Reserve monetary policy.

The US Dollar lost substantially when the Fed first announced and implemented Quantitative Easing measures to boost monetary supply and stave off the risk of deflation. Fed Chairman Ben Bernanke has openly discussed various tools at the central bank’s disposal to counteract sluggish growth and promote price stability. If CPI and PPI surprise to the downside, pressure may increase on the Fed to announce fresh QE measures—likely driving the US Dollar lower against major counterparts.

One gets the sense that risks remains to the downside ahead of these key US consumer-centric economic releases, and significant disappointments could easily jolt the fragile recovery in financial market risk sentiment. Any such deterioration in ‘risk’—especially as seen through the S&P 500—could be enough to force the US Dollar through key resistance levels against the Euro and British Pound in the week ahead. Yet traders should likewise watch CPI and PPI data; any significant downgrades in inflation could just as easily force US dollar declines.

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