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Fundamental Forecast for Dollar:Neutral

• A 75,000 job ‘beat’ by the July NFPs data bolstered growth prospects and lifted the chances of a 2016 hike to 47 percent

• Volatility readings have tumbled this past week with the FX measure at a 7-month nadir and equity-based VIX at 2-year low

• See our 3Q forecasts for the US Dollar and market benchmarks on the DailyFX Trading Guides page

The Dollar recovered from an initial slip this past week to close the period in the green. However, the fundamental cost to lift the Greenback was remarkably high. It will be difficult for the currency to keep buoyant – much less maintain the pace of the rebound – heading into the coming week. Well-positioned fundamental motivation was distributed over the past few weeks to arrest the two-week tumble and in turn lift the USDollar up as much as 1.0 percent from its recent low. Ahead, the US docket lacks the authority to keep the charge. The comprehensive slide from the Dollar’s counterparts will ease without additional stimulus milestones. And, a change in risk winds may very well hurt the currency before it revives its haven appeal.

To appreciate the hurdles ahead, it is important to recognize the fundamental fuel that has directed the market recently. One of the most productive drivers was the strong showing from the US July labor report. The nonfarm payrolls (NFPs) bested forecasts substantially with a 255,000 net increase in jobs. It was just as much the ‘surprise’ element to the data as the general strength in a 4.9 percent unemployment rate and 2.6 percent annual wage growth that the Dollar. Rate expectations did improve on the news with the probability of aSeptember rate hike rising from 18 to 26 percent while the chances of a move by December rose from 37 to 47 percent. That is still far from erasing the skepticism that has kept hawkish calls in check, but the contrast between the Fed and its global counterparts remains cavernous.

In addition to the monetary policy advantage, the strong employment figures lend a stability ability to the US and its market. Following successive downgrades in growth forecasts for much of the world from the IMF and other international bodies, an economic flag like this does not go unnoticed. Along with the significantly improved 3Q GDP forecasts from the Atlanta Fed’s GDPNow (3.7 percent) and New Fed’s Nowcast (2.6 percent), the pain from the tepid 1.2 percent annualized 2Q GDP reading has dissipated. Here too, the Dollar’s standing is amplified by the weakness of its counterparts. Economic struggle and financial instability for the Eurozone, Japan, the UK and China lower the threshold for the US as speculative destination.