Fundamental Forecast for Dollar: Neutral

The Greenback advanced against all of its major counterparts this past week, and the USDollar secured its strongest two-week rally since the May 2015 climb forestalled a bearish reversal. Such a strong upswell comes with a surprising lack of solid fundamental support. General growth forecasts haven’t improved material through economic updates. Market rate forecasts haven’t budged from deep skepticism. And, we haven’t seen evidence of traditional risk aversion. That leaves speculators in charge. Is there enough conviction from the trading ranks – or perhaps short-covering to work through – to keep the Dollar rising through the coming week? Could traditional fundamentals take up the reins?

We have seen the FX market’s sensitivity to small changes in rate speculation behind the Fed and other central banks deflate some time ago. In fact, over the past weeks; there was remarkably little speculation to arise from the FOMC decision (and statement), US 1Q GDP and April NFPs. The burden of leveraging a heavy Dollar swing on the basis of the next hike being moved forward or back by three months has risen sharply. On the one hand, skepticism over the Fed’s ability to hike again in the current environment has grown exceptionally resolute. It would take a considerable shove to raise the speculation of a June hike – currently swaps and Fed Fund futures price no chance (0% probability). The more systemic issue is that the market is less responsive to relative monetary policy as the variances are realistically very small, and skepticism over its efficacy is rising – particularly at the extreme dovish end of the spectrum.