A number of major market themes were driven this past week; but for FX, the Dollar’s remarkable volatility grabbed most traders’ attention. Will the Greenback finally rekindle a full trend and pull the broader FX market it once again in the coming weeks? Taking measure of the currency’s performance this past week, the range of the past 10 months held firm with the 200-day moving average keeping the floor beneath the Dow Jones FXCM Dollar Index (ticker = USDollar). However, the technical restraints doesn’t fully account for the extraordinary volatility experienced. The sharpest two-day drop intraweek in two-and-a-half years, followed by a robust Friday rebound speaks to a market more capable of transitioning to a genuine trend.     

Fundamental Forecast for Dollar: Neutral

Over the past year, the Dollar’s bullish ambitions have tangibly cooled. While this hasn’t seen the currency completely lose grip, it has certainly lost the remarkable momentum through 2014. This restraint is borne from the market’s doubt of the FOMC’s ambitious monetary policy forecast. Despite the central bank’s December rate hike, the market has maintained its boldfaced skepticism of the group’s projections for its pace of tightening this year. According to the forecasts from the policy authority at liftoff, 2016 will supposedly see 100 basis points (bps) of gradual hikes. That is four moves at a standard 25 bp clip. In clear contrast, the market through swaps and Fed Fund futures show serious doubt of even one hike. That disparity was clear through 2015, with each deferment by the Fed justifying the Dollar’s waylaid advance. As of today, the disparity between market and central banks is as large as we have seen in years.

As this extraordinarily fundamental discrepancy closes (conforming to the dovish market or hawkish Fed), the impact on the Dollar will be substantial. The influence this theme holds over the market was evidenced in last week’s volatility. The dramatic two-day drop through Thursday was spurred by the troubling employment, inflation and business details of the ISM service sector report. The subsequent rebound was just as clearly launched by the January employment report. While the headline NFPs may have fallen short of consensus, its average has been a hefty positive net increase of jobs month-in-and-month-out. Moreover, the unemployment rate has dropped to a multi-year low 4.9 percent and the inflation component in wage growth swelled. Further support of this clout can seriously swing the greenback’s next trend.