Fundamental Forecast for the US Dollar: Bullish

The greenback closed the week lower by 0.63% as volatility in equity markets persisted with the Dow Jones Industrial average falling more than 4% on the week. The NASDAQ suffered the steepest decline with a loss of more than 6.6% after a flurry of disappointing economic data continues to suggest a slowdown in domestic growth. But the concerns don’t stop there; indeed the deterioration of economic data seems to be on a global scale with stock markets remaining in a heightened sense of alertness to any developments and data points.

This week’s docket saw inflation accelerate at a more moderate pace while existing home sales upset expectations with a contraction of 3.5% in July. The data is coupled with a multiyear low in the Philadelphia Fed survey which plummeted to -30.7 and a slightly higher than expected weekly jobless claims report. As noted in Thursday’s USD Trading Today report, sluggish growth in the employment sector coupled with weaker growth prospects and rising inflation now sees a growing risk of a period of stagflation, an unwelcomed relic of the past. Also continuing to weigh on sentiment are ongoing concerns about the situation unfolding in Europe as officials scramble to restore investor confidence and stem the threat of contagion.

Next week’s economic docket is highlighted by the July new homes sales, durable goods orders, and GDP reports. Investors continue to eye housing data for any indication that the ailed market has turned, with consensus estimates calling for sales to rise by 1.0% m/m after a decline of 1.0% a month earlier. Orders for durable goods are also expected to show signs of improvement with expectations calling for a read of 2.3% after a 1.9% decline in June. After the string of dismal data seen in recent days, an upbeat print could see market jitters ease as concerns over a possible double dip scenario abate. However the 2Q GDP data later in the week may weigh heavily on markets with consensus estimates calling for an annualized read of 1.1%, down from a previous print of 1.3%.

As investors come to terms with softening growth prospects, all eyes will be fixated on Friday’s Jackson Hole Economic Policy Symposium where central bankers from around the world will convene to discuss pressing matters facing the world’s developed economies. Investors will be lending a keen ear to remarks made by keynote speakers Fed Chairman Ben Bernanke and ECB president Jean-Claude Trichet as markets continue to suffer from a mass exodus out of risk. Although it’s highly unlikely that policy makers will introduce further easing measures, traders will be eagerly anticipating the comments as uncertainty regarding domestic growth prospects take root.

US Dollar price action hangs in the balance, with the largest risk to the dollar resting with the remarks coming out of the Jackson Hole summit. Although the greenback fell despite sharp losses in the equity and commodity markets, the dollar may continue to be well supported if the summit yields little in the way of future policy actions to support investor confidence. Subsequently the dollar is likely to strengthen as traders continue to deleverage amid substantiated concerns of a possible slide back into recession. The Dow Jones FXCM US Dollar Index (Ticker: US Dollar) continues to hold between the 61.8% and 50% Fibonacci extensions taken from the June and November 2010 crests at 9380 and 9560 respectively. The 9380 level remains crucial, with a break below risking further losses for the greenback which will target subsequent floors at 9250 and 9150. Interim topside resistance holds at 9525 with a breach of the 50% extension eyeing targets at 9640 and 9700.

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