Fundamental Forecast for Dollar: Neutral

The Dollar tumbled this past week as a tempered view for Fed rate hikes rendered the currency incapable of taking advantage of the improved sentiment across global markets. Up until the central bank’s December liftoff, the Greenback maintained a positive risk orientation. In other words, when market participants were seeking trades with higher return or would otherwise climb when confidence was on the rise; the Dollar advanced on the back of its first-mover for interest rates. That ‘hawkish’ view has deflated significantly through 2016, but is the retreat permanent? Will the USD be buffeted by fundamental cross winds from the ECB rate decision or Chinese National Peoples’ Congress (NPC) while awaiting the March 16 FOMC decision?

To get a sense of the market’s view of the Dollar moving forward, it is worthwhile to refer to both the technical and fundamental picture. Technically, the Dow Jones FXCM Dollar Index (ticker = USDollar) has pulled back to its 200-day moving average and the floor of a persistent but gradual rising trend channel tracing back 10 months. Fundamentally, traders are holding their breath for an event that is due the following week to clarify the currency’s position in the ranks for return – and possibly spur risk trends. Both present a sense of magnetism to keep the market in line and a deferment of conviction.

However, speculation rarely abides convention. While we may be counting the days down to the Federal Reserve’s ‘quarterly’ policy decision whereby forecast updates and press conference will be served up, we have seen remarkable volatility in the market’s outlook for the rate path. Over the past two weeks, rate forecasts climbed from levels that showed complete skepticism of any further hikes from the central bank through the coming year toa level reflecting one, 25-basis point hike (both in Fed Funds futures and overnight swaps).