Fundamental Forecast for US Dollar: Neutral
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NFPs data beats with a 146,000 increase and four-year low 7.7 percent jobless rate
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Fiscal Cliff discussion continue through the week and it seems compromise moves further away
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Technicals show support for many dollar pairs, is it a chance for a rebound or breakdown?
The dollar’s performance this past week – like the broader capital and FX markets – was uneven. Nevertheless, the first three-day rally from the Dow Jones FXCM Dollar Index (ticker = USDollar) in three weeks and an impressive reversal from the benchmark EURUSD have called traders attention for what could happen over the coming week. In the scheduled and unscheduled event risk over the coming trading week, we see the fundamental heft that could activate underlying trends. The Federal Reserve’s final monetary policy decision of the year, key milestones on the Euro-area crisis and the ongoing discussions over the Fiscal Cliff are the type of items that can tap elemental considerations like risk appetite trends. The impact from these fundamental highlights alone looks good for a breakout, but what about the year-end liquidity drain? And how do we reconcile the likely outcomes of these events with the heavy technical levels in view?
There are three facets of the market to consider moving forward, and all three point to a very different outcome for sentiment and the greenback. First, there is the technicalaspect. Looking to the charts, positioning and volume for various markets; we see a common resistance in ‘risk’ and particular exhaustion in exposure. Of particular interest are the impressive rallies in US, European and Asian equity indexes into their respective trendlines and Fibonacci retracements. On the FX side, we find high risk-profile pairs like AUDUSD and NZDJPY anchored to the top of multi-year wedge patterns. Pair that with declining volume and over-saturation in risk holdings (COT figures show net long futures interest in the Aussie dollar hit a record high this past week), and it seems we are ripe for reversal.
However, every technical barrier can also be an opportunity for triggering a breakout. Fundamentals will certainly play a critical part in deciding our bearings and whether we can unite enough of the market behind the same cause and force a breakout or lasting trend. As it happens, the aforementioned three major events carry a probable outcome that doesn’t support the safe haven dollar. Most immediate – chronologically and psychologically – is the Fed decision. This gathering is already unique in that it comes with quarterly updated forecasts and Chairman Bernanke press conference. What makes it truly special though is the likelihood of ‘new’ stimulus being introduced.