Fundamental Outlook for US Dollar: Bullish

- US Federal Reserve hints at further Quantitative Easing, Sinks US Dollar
- Home Sales data remains near record-lows, bodes poorly for economic outlook
- Positioning and signs of reversal nonetheless warn of potential US Dollar recovery

The US dollar finished sharply lower against all major forex counterparts on a week of mediocre economic data and a noteworthy shift in rhetoric from the US Federal Reserve. The highly-anticipated Federal Open Market Committee (FOMC) interest rate announcement and statement forced sharp moves across financial markets. Officials strongly suggested that they stood ready to restart Quantitative Easing (QE) measures if the need presented itself, and an especially dovish tone on inflation implied that such a move could come sooner than later. Given that the US dollar fell precipitously on the first wave of QE, the prospect of QE Part 2 could spark continued USD weakness against major counterparts.

Market focus on the Fed’s next moves will make US economic data especially market moving, and a relatively busy calendar in the week ahead could bring sharp US dollar volatility. Second revisions to Q2 Gross Domestic Product data may be the highlight of the coming days of trading, but traders should likewise watch for surprises out of earlier-week Consumer Confidence figures and end-of-week ISM Manufacturing data.

Market reactions will likely be linked to implications for the Fed’s next monetary policy moves. US dollar moves on Consumer Confidence and GDP results should subsequently be straightforward; disappointments should force USD declines while positive surprises would likely see the Greenback rally. This should also roughly prove true for market reactions to ISM Manufacturing data, but any particularly large shifts in the “Prices Paid” index could blur implications for the dollar. Consensus forecasts for all of these economic releases point to deterioration in economic conditions. Such bearish expectations leave plenty of room for positive surprises, but continued disappointments in US economic data hardly inspires confidence in prospects for the week ahead.

Short and medium-term momentum favors US dollar declines, but the threat of sharp upward corrections grows as sentiment hits further USD-bearish extremes. Our most recent FX Options and Futures weekly report underlines the fact that many speculators are betting on further Greenback weakness. Said traders are usually in the right direction of the trend, and we have accordingly called for USD weakness. Yet traders should be careful of chasing US dollar declines amidst high risk for corrections and monitor position risk accordingly.

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