Fundamental Forecast for the US Dollar: Bullish

The US dollar saw a potentially important turnaround through late-week trade, setting the stage for continued strength in a pivotal week for fundamentals and perhaps broader market sentiment. US Nonfarm Payrolls data will dominate foreseeable event risk in the week ahead, but the usual slew of early-month economic data could likewise spark important Greenback volatility. Early indications suggest that a late-week US Dollar bounce could be the start of a larger recovery.

Volatility expectations picked up ahead of what promises to be an eventful week with highly-anticipated NFP data due Friday. Yet earlier Personal Income and Spending, ISM Manufacturing, ADP Employment Change, Initial Jobless Claims, and ISM Services results could likewise drive important US Dollar moves. Consensus forecasts point to fairly muted job growth through the first month of 2011, and the domestic Unemployment is expected to tick higher as a result. The recent US Federal Open Market Committee interest rate decision showed that officials remain concerned with weak employment growth, and said concerns are central to the FOMC’s decision to stick with ultra-accommodative monetary policy. Thus markets will watch with interest to see if January’s figures confirm the Fed’s fears and point to lackluster job creation—likely keeping the US Dollar relatively weak amidst aggressive Quantitative Easing and record-low interest rates from the central bank.

A generally strong wave of US economic data arguably leaves risks to the topside ahead of important data releases. Conference Board Consumer Confidence data shows attitudes on labor market conditions improved considerably through January, while Q4 GDP numbers likewise showed an important pickup in consumer spending. All of this will amount to little, however, if NFP’s disappoint significantly to the downside. Thus we will watch with interest to see how early-week economic data shapes expectations for later-week results and market reactions to said data.

It is a potentially pivotal stretch for the US Dollar amidst a noteworthy reversal through Friday trade, while the US Dow Jones Industrial Average likewise saw a noteworthy pullback from lofty highs. We have made little secret of the fact that we expect the US Dollar to strengthen through 2011, and indeed several DailyFX analysts have recently gone long the Greenback on what could be the bounce we have expected. It is always especially difficult to time market reversals, and we may need to see considerable US Dollar continuation to claim that this is the turn. Suffice it to say, it will be interesting to watch whether the coming days will live up to expectations and produce the volatility we have come to expect from the first trading week of the new month.

Ongoing unrest in Egypt may be another important theme to watch. Yet making any sort of definitive forecasts on a fast-shifting situation seems a fool’s errand. It is something to keep an eye on, as any significant flare-ups in tensions would likely benefit the safe-haven USD.

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