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DOLLARFUNDAMENTAL PREVISION: BULLISH
- The US dollar sees support based on returns and shelters in January employment data
- Markets strongly encourage the Fed's dovish and despair signs of a strong economy
- Upcoming risk aversion can offer upward tracking of the US dollar
Looking for a technical perspective on the US dollar? Check Weekly technical forecast in USD.
The disappointing US dollar response to unusually strong January employment data speaks volumes about the underlying drivers of currency performance. The payroll has grown at the fastest pace in 11 months, while an increase in the unemployment rate seems to be occurring for all the right reasons given the parallel rise in labor force participation. . Salary inflation has been moderate, but has remained relatively strong at 3.2% over one year.
Treasury bond yields rose as the impressive data set laid the foundation for the 2019 monetary policy outlook announced in the futures. Risk appetite also strengthened in the beginning, but the leading indicator, the S & P 500, quickly lost momentum and turned down. The greenback initially rose with yields, but fell back when equities peaked intra-day, then rebounded to recover lost ground as the weather deteriorated.
DOLLAR, S & P 500 OFFERS TO RESPOND TO US EMPLOYMENT DATA
This jagged action reflects the opposite roles of the benchmark currency as a return and hedge research badet. On the one hand, it continues to generate the highest base rate of return in the FX space of the G10, which should align with the risky badets. On the other hand, its unparalleled liquidity makes it a desirable badet when capital escapes from other corners of the market in a context of widespread liquidation.
Similarly, it is said that the investor mood has deteriorated not only despite evidence of a stronger US economy than expected, but probably because of this. Traders have applauded the Fed's rhetoric last week despite growing concerns from policymakers about the global economic outlook. The potential of data flow to revive a more hawkish disposition has reversed this dynamic.
This seems to indicate widespread unease in the financial markets. What could have been encouraging for the sustainability of global growth is seen as a threat to the extent that it could discourage political support. This seems to imply the prevalence of a gloomy world view among market players, as any sign of short-term strength has been dismissed, it is better to focus more on darkening the outlook.
AVERAGE RISK OF ENTRY MAY BE SENT BY DEMAND IN USD
All things considered, this suggests that the path of least resistance favors risk aversion. This bodes well for the dollar, which seems to show a more and more constant ability to capitalize when traders become defensive. The coming week offers many potential triggers for a market rout. If this materializes, an increase in the demand for liquidity will probably increase the US dollar.
Chinese PMI data could indicate a slowdown in the world's second-largest economy, even though trade negotiations with the United States remain inconclusive. The policy statements of the RBA and the Bank of England could reiterate concerns about slowing global growth and the threat of a "no agreement" Brexit. Optimistic US ISM data could have about the same effect as the January jobs report.
— Written by Ilya Spivak, Senior Currency Strategist for DailyFX.com
At contact Ilya, use the comments section below or @IlyaSpivakon Twitter
RESOURCES FOR EXCHANGES IN AMERICAN DOLLARS
Other weekly basic forecasts:
Australian dollar forecast – Australian dollar could wilt if target returns to interest rates
Canadian dollar forecast – Canadian dollar could be split between upbeat local and US data
Oil forecasts – Crude oil prices risk greater recovery of stagnant supply outside OPEC
Sterling forecast – Stable Sterling after return
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