Fundamental Outlook for US Dollar: Neutral

The US dollar finished the week lower against all major currencies except the Japanese Yen, but a later-week reversal suggests that the dollar may have set an important low. Intensely choppy price action made it difficult to latch on to said US dollar strength. Yet it serves to note that such elevated volatility often comes amidst major market reversals, and we would argue that the risk of a major USD bottom is high. A busy week of economic event risk ahead may nonetheless be the ultimate decider of short-term US dollar moves, and it will be critical to watch for any surprises in a highly-anticipated Q3 Gross Domestic Product report.

Markets will likely post sharp reactions to any surprises in GDP growth data, but it will likewise be significant to monitor trends in other market-moving events. Top events will include Existing Home Sales data, Consumer Confidence survey responses, Durable Goods Orders, and late-Friday U Michigan Consumer Confidence readings. Current market focus on US Federal Reserve rhetoric and general macroeconomic trends may make economic data especially contentious.

Traders have driven the US dollar lower on expectations that the Fed will almost certainly deliver further Quantitative Easing at their November policy-setting meeting. In fact, market debate has shifted from whether the Fed will ease policy to “how much” they will pump into fixed income markets. Such high odds give us the sense that the US dollar could easily rebound if the Fed disappoints, and the economic data leading up to their November meeting becomes especially significant. The Fed’s dual mandate requires it to control prices and maximize employment, which makes inflation and labor market data the most significant in determining policy. All the same, GDP growth trends and consumer-centric confidence surveys could likewise have noteworthy impact on policy. It is difficult to handicap which way these data releases will swing, but we would argue that USD risks remain to the topside given bearish market expectations.

We have been calling for a major US dollar reversal for some time now and have admittedly been premature in our forecasts. Yet the USD’s sharp bounce from recent lows suggests an important bottom may be in place. The EURUSD’s inability to close the week above 1.40 handle keeps this author’s bearish bias intact, but it will be critical to watch price action in what could be a pivotal week of price action.

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