Fundamental Forecast for US Dollar: Neutral
- US Dollar plummets as Fed hints at QE3
- Suddenly-downtrodden Greenback nonetheless fights back at key support
- Forex market volatility continues near five year lows – how do we trade?
The US Dollar (ticker: USDOLLAR)
posted its single-largest weekly decline against the Euro in six
months, hounded by speculation that the US Federal Reserve would soon
implement a fresh wave of Quantitative Easing (QE3) and tumble in US
Treasury Yields.
Official commentary from the US Federal Open Market Committee sent the US Dollar
sharply lower as FOMC officials candidly discussed a fresh wave of
monetary policy easing (QE3). Traders immediately increased their bets
on large-scale asset purchases, and US Treasury yields fell sharply on
the likelihood that Fed would work to keep interest rates depressed.
A relatively empty economic
calendar for the week ahead suggests that further USD tumbles are
relatively less likely. But what could potentially force the US Dollar
to defy expectations and continue lower against the Euro and other FX
counterparts? The second week of September may bring the next
market-moving catalyst on the scheduled US FOMC rate announcement, a
European Central Bank monetary policy decision, and a potentially
critical German ruling on the legality of the European bailout plan.
In the meantime, there is modest risk that next week’s Economic Policy Symposium in Jackson Hole could bring important announcements from Fed Chairman Ben Bernanke and ECB President Mario Draghi. Bernanke famously used his 2010 speech at Jackson Hole
conference to say that the Fed was prepared to provide further
accommodation—all but guaranteeing the second wave of Quantitative
Easing (QE2). Recent FOMC rhetoric may take the surprise factor off of
any Fed announcements, but it will likewise be interesting to listen to
the ECB’s Draghi on the future of the bank’s intervention in sovereign
bond markets.
The Dow Jones FXCM Dollar Index finally broke out of its 3-month consolidative range, and we’ll admit that the move caught us by surprise given our earlier forecasts for further range trading.
To paraphrase a popular quote in finance: when the facts change, we
change. And we would change our minds and shift our US Dollar bias, but
the truth is that the facts are mostly the same.
Implied volatility
expectations from FX options prices are still near five-year lows—making
big currency moves unlikely. We would further argue that major
macroeconomic risks to the Euro Zone and the dangers of sharp slowdowns
across the world’s most important economies should favor the safe-haven
US currency.
Seasonal tendencies suggest that currencies are most likely to set monthly highs and lows
in the first and last week of each month, and that pattern could see
the USDOLLAR break its month-to-date lows in the week ahead. Yet it will
likely take a much larger catalyst to force a more significant
breakdown. We’ll remain on alert for unexpected developments out of
Jackson Hole, but it might otherwise be another week of directionless
summer trading. – DR
Source : www.dailyfx.com
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