Fundamental Forecast for the US Dollar: Neutral

The US Dollar fell for a second consecutive week as the Fed rate hike outlook continued to deteriorate. Geopolitical jitters are almost certainly a big part of that story, even if the narrative has somewhat shifted from US tensions with Russia and North Korea to EU politics. Homegrown factors have also emerged however amid growing worries about slowing economic growth.

An ominous picture is painted by the closely watched GDPNow model from the Atlanta Fed. It updates quarterly GDP growth projections with each incoming bit of relevant economic data. That forecast now predicts that output will add just 0.5 percent in the three months to March. That is far weaker than the 1-2 percent range expected by the markets.

This disparity will be addressed as the first official estimate of first-quarter GDP growth crosses the wires in the week ahead. Consensus forecasts already point to a slowdown, with the annualized growth rate seen ticking down to 1.1 percent from 2.1 percent in the final quarter of 2016. US news-flow has sharply deteriorated relative to baseline projections recently however, opening the door for a still weaker result.

Such an outcome may undermine the Fed’s case for three rate hikes in 2017 in the minds of investors, pressuring the greenback downward. The GDP report is set for release on Friday however, the currency at the mercy of other catalyst in the interim. On this front, the French presidential election set for this weekend may very well prove formative.

Voters will go to the polls to narrow their options from four to two contenders. The latest polling data has the field clustered near the 20 percent support mark. That makes the possibility that they will be stuck with choosing between two eurosceptics – Marine Le Pen on the right and Jean-Luc Melechon on the left – uncomfortably high.