Fundamental Forecast for the US Dollar: Neutral

The US dollar recovered sharply against all G10 counterparts through the past week of trading, setting the stage for a broader Greenback recovery after registering bearish sentiment extremes following months of declines. A flight to safety was ostensibly the reason for the USD recovery, but fresh multi-year highs in the US S&P 500 hardly suggest risk sentiment has suffered. We have long argued that the US dollar stood to recover noticeably from important bearish sentiment extremes. And though it is extremely difficult to time reversals, recent price action suggests that the Greenback could continue to strengthen in the week ahead.

A busy week of US economic event risk promises considerable volatility in the days ahead, and Sunday’s open should give a strong sense of what to expect through subsequent trading. Advance Retail Sales data, Federal Open Market Committee Minutes, and Consumer Price Index inflation figures could spark substantive market reactions on any surprises.

Markets continue to speculate on whether the US Federal Reserve will soon move to reduce extensive monetary policy stimulus amidst encouraging signs for growth. Yet recent rhetoric from Fed Chairman Ben Bernanke made it clear the Federal Reserve has little intention to reduce extraordinary Quantitative Easing policies amidst sluggish employment growth. It will be interesting to watch whether Thursday’s Consumer Price Index figures will put pressure on the Fed to act on growing price pressures. If nothing else, any strong surprises to the topside would only increase discord and embolden the hawkish minority within the policy-setting FOMC.

The US dollar seems to be at somewhat of a crossroads. After falling sharply into early-week trade, a substantive later reversal suggests that the beleaguered currency may have set an important low against the Euro and other counterparts. Whether or not said reversal comes to bear may very well depend on Sunday and Monday trading—setting the pace for the rest of the action-packed week of event risk. Our analyst team has made little secret of a US dollar bullish trading bias, and recent price action has been quite encouraging for Greenback bulls.

DailyFX provides forex news on the economic reports and political events that influence the forex market.