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Forex pairs in this Article » USDOLLAR, EUR/USD, USD/JPY
us_dollar_forecast_improves_as_markets_quiet_down_body_Picture_5.png, US Dollar Set to Recover as Markets Catch Their BreathUS Dollar Set to Recover as Markets Catch Their Breath

Fundamental Forecast for US Dollar: Bullish

  • Dollar tumbles but carves higher low following US Nonfarm Payrolls data
  • Retail speculators buy USD declines, clear caveat in otherwise-bullish forecast
  • With the benefit of hindsight, this forecast looked pretty good. What now?
The Dollar went from best-to-worst in a hurry, falling from fresh multi-year highs on a substantial Japanese Yen surge and matching its worst weekly decline since 2011. We wrote at the beginning of the week that the USD and Yen were on the verge of something huge—now what?

Last week saw a combination of factors that led to substantial volatility on an extraordinarily busy economic calendar, but the coming week looks far less eventful. An important exception is a highly-anticipated Bank of Japan monetary policy meeting , which threatens further USDJPY (and broader US Dollar) volatility. Given the carnage we saw in the Dollar/Yen exchange rate and other pairs in the past few days, it would be natural to see markets consolidate before their next big move.

Volatility prices have come off sharply from recent peaks and point to slower moves in the days ahead, and indeed our Senior Technical Strategist sees evidence that an important US Dollar low is place versus the previously high-flying Euro. Could aslowdown actually produce Dollar strength? Maybe.

We recently argued that the Dollar-long trade was far too crowded, and market deleveraging could actually produce USD weakness. If we see the opposite and conditions become more normal, it stands to reason that traders will look for opportunities to buy back into the Dollar uptrend.

US economic event risk is light, but Thursday and Friday could see some event-driven moves on surprises out of Advance Retail Sales and U of Mich Consumer Confidence data. The top theme in US markets is clear: when will the fed “taper” its Quantitative Easing measures? This article does a thorough job of explaining what the so-called taper means and specifically why it matters to the US Dollar.

Will market views on the taper completely shift on Retail Sales or Consumer Confidence data? Probably not. But everyone’s trying to be the first one to time the Fed’s shift, and we’ve been surprised by strong market reactions to normally less-insignificant data releases.

It’s shaping up to be a quieter week for the US Dollar and broader financial markets, but everything’s relative—even a slowdown from the past several days could mean big things for the USDJPY. The Dollar could see respite after its recent tumbles, but we’re reminded that almost anything could happen if market deleveraging begins in earnest.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.

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