Will This Week's Data Determine the Dollar's Fate?

This article is written by Matthew Clark who is the owner of Global Forex Pros.

ABOUT THE AUTHOR: Matthew has been a trader for more than 20 years running FX Desks at major banks and retail brokers. He recently started Global Forex Pros as a service for brokers to offer their clients, teaching them to trade in real-time as professional traders learn at banks and institutions, giving the retail trader the confidence to trade and increasing volumes for the broker.

The last few weeks have certainly been volatile for the dollar, as following the FOMC rate decision the market pushed back its bets on raising interest rates. The dollar has been traded lower for the last 2 weeks sending it to its largest 2-week decline since 2011. Whilst the fundamental evidence for the medium term supports the currency’s progress, there seems to be a growing feeling that some correction to the dollars run is overdue.

Having said that we can see from the dollar index monthly chart below, even though the dollar is over bought on an RSI basis at levels not seen since the early 1980’s, it is likely that it will close the month positive for the ninth consecutive month, the most in the history of the shared currency.

The dollar started to struggle on March 18 , when Fed policy makers cut forecast on economic growth and interest rates, keeping rates unchanged and indicating they were in no rush to increase rates for the first time since 2006. The market had been looking for a rate rise by the middle of the year with some even calling for April, but this quickly changed. Futures prices showed a 55 percent chance of an increase by September on March 17, the day before the Fed meeting; these are now down to around 36 per cent.

“Given the speed of the dollar rally, it was due to have a period of consolidation, and obviously the Fed provided the trigger for that,” Peter Dragicevich, a strategist at Commonwealth Bank of Australia, said in a recent Bloomberg interview. The dollar came under strong selling pressure at the beginning of last week taking out the post-FOMC lows before suddenly changing course on Thursday when Atlanta FED's Lockhart (usually a dove) suggested a rate hike between June and September. But an unexpected fall in Durable Goods Orders for February and a final revision of Q4 GDP to 2.2% affected the likelihood of an imminent rate hike. If we take into account the recent lower revisions in forecast for Q1 GDP by some of the major investment banks to between 1.8% and 2 %, the likelihood of dollar weakness for April persists.

As April approaches, the week ahead is a full economic calendar with fresh data that should give us some clarity as to whether the correction is over or a more meaningful top is in place. With comments from Yellen that any rate decisions will be more data, all eyes this week will be focused on the Personal Income data ( which is important as the FED uses these figures as a measure of inflation) , housing data , Consumer Confidence Index and then the month's most important number at the end of the week Friday's Non-Farm payrolls.

There has been increased concern over weak US data lately, as well as the strength of the dollar on US earnings. On Friday, the Fed's Chair Janet Yellen reiterated that she expected policy makers to raise rates this year but that initial and subsequent increases were data dependant and they would be gradual without following a predictable path. The promise of a future rate hike is now not enough to keep buying the dollar and if the data ahead of Friday's NFP disappoints, we should see bearish momentum on the dollar increase.

The US economy has consistently added on average over 240k new jobs on a monthly basis for almost a year (although in our opinion the average hourly earnings has been disappointing and overlooked by the market) whilst the unemployment rate now stands at the FED's target of 5.5%. If we are inline or slightly better than 248k new job expectations, we believe this will not be good enough for fresh dollar buying and if the week's data fails to impress then expect the dollar to correct. It is important to note that markets will be thin on Friday with a lot of traders away from their desk it being the start of the Easter weekend and any moves will be exaggerated and sharp.

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