Can the Dollar Regain its Pre-Summer Strength?
Against the Euro, the US Dollar is trading at its lowest levels in nearly two years and at this stage it is clear that there is very little in the way of fundamental activity that can turn the Dollar back to positive before the end of the year.Most of the Dollar strength seen earlier in the year was based on the growing expectations that the Federal Reserve would begin cutting back on its monthly stimulus purchases (currently valued at $85 billion each month). Original expectations were for the Fed to make a $10-15 billion reduction in Treasuries and mortgage backed securities at the September FOMC meeting but when this did not occur the Dollar was set on its slippery slope to a prolonged downtrend.
To make matters worse, the US government shutdown resulting from the inability for Republicans and Democrats to agree in appropriate budget cuts before raising the debt ceiling was seen shortly thereafter. By most accounts, the delays and missed data releases could cost the US economy as much as $25 billion in fourth quarter growth output. Given these estimates, a larger number of analysts have suggested that the Federal Reserve is now in no position to start cutting back on stimulus, as this could only bring added volatility to stock markets and bring additional damage to consumer confidence. The end of the year is generally thought of as the holiday season but this is an important economic time of year as well, so it is looking less likely that the Fed will make any substantial changes to its stimulus programs.
The Week Ahead in Forex Markets
In the week ahead, most of these themes are likely to remain relatively constant. Most of the attention of forex traders is going to be directed solidly at any central bank commentaries from voting members of these economic bodies. Macro data is likely to be viewed as less essential, but we will have some key reports that should not be overlooked entirely. On Tuesday, we will have the monthly Retail Sales figures, followed by Consumer Inflation on Wednesday, and finally the ISM manufacturing report on Friday. Longer term forex traders will need to take note of the results as this will impact the broader outlook for any potential Fed policy changes.
The week’s biggest events will come with Wednesday’s Federal Open Market Committee, where Ben Bernanke and Co. will be expected to give additional clues on the general bias espoused by the central bank. Expect a dovish bias to weigh even more heavily on the Dollar, as there will be renewed forecasts that Fed tapering will not happen until we are well into 2014. If we were to see a more upbeat assessment of the economy, however, there will likely be a relief rally in the Dollar, as forex traders position for some further changes in general market bias. In either case, the meeting will be highly informative and give some important directional clues for forex markets.