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Data, Fed Stance Should Support Dollar

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March 24, 2014 By: , No Comments

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Forex markets saw some renewed Dollar buying last week, as a series of factors are currently acting in tandem to support the outlook for the greenback.  The longest running story in this area can be seen in the continued commentaries from the US Federal Reserve which all but confirm that QE stimulus programs will continue to be phased out at their current rate.  If this turns out to be the case, there will be fewer Dollars running through the system with no changes in market demand.  This is a bullish scenario for any asset and should continue to work in the Dollar’s favor going forward.

But the arguments do not stop there, as we have also seen steady improvements in economic data as well.  From the employment sector to the manufacturing sector, last week’s releases passed market expectations and gave clear indications that the economic recovery is still proceeding even as stimulus monthly injections are being reduced.  So from a fundamental perspective, there is little reason to be surprised in the fact that the Dollar appears to be strengthening against its major counterparts.

On the technical side, similar arguments could be made as the greenback was becoming heavily oversold against the Pound, Swiss Franc, and the Euro.  This weakness was not really matching the fundamental picture, so this likely gave traders enough of a reason to start taking profits and scaling back on positions as we were reaching these extreme levels.  Since little in the fundamental backdrop has changed, we will probably see these trends continue for most of next week.  The data calendar is a bit more subdued in many areas of the world, so there is a better chance that traders will work off of the momentum that was seen last week.

The Week Ahead in Forex Markets:  Ukraine, Russia Situation Could Add to Risk Aversion Climate

In the week ahead, it will be important for traders to watch for new developments in the rising political and military tensions in Russia and the Ukraine.  To some, this might seem irrelevant to forex markets, given the fact that most traders to not deal with the currencies in these countries.  But the real question here is the level of risk that forex traders are willing to take if we fail to see any real efforts at resolving the potential military conflict.  If we do see a need for safe haven assets, the most likely asset candidates for a fresh bull run could be seen in gold, the Swiss Franc and in the US Dollar.

So when we pair this scenario with the underlying fundamentals that should continue to support the Dollar in the coming months, there is very little reason to be bearish on the currency any time soon.  The trends that were visible last week are likely to be upheld in the next week’s forex trade, so look for the currency to be bought on short term dips.

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