Fundamental Forecast for the US Dollar: Bearish

The US Dollar crumbled anew last week, suffering deep losses against all of its major counterparts. What started as a corrective pullback following the prior week’s forceful rebound turned into rout after January’s CPI data crossed the wires.

The inflation rate topped forecasts – sparking a brief burst of panic across financial markets – but ultimately underwhelmed. It registered unchanged from the prior month at 2.1 percent on-year, a limp result in the eyes of markets primed for fireworks after wage growth unexpectedly surged to a nine-year high.

That jump in wages stoked fears of a far more aggressive Fed rate hike cycle than markets had accounted for, sinking stock markets and putting the greenback on the offensive. When the headline price growth reading underwhelmed, those worries evaporated.

The narrative prevailing before February 2 is seemingly back at the forefront. That envisions a broadening global recovery forcing central banks to follow the Fed’s hawkish lead, narrowing the Dollar’s yield advantage and pushing capital flows toward now seemingly cheap alternatives.

Minutes from January’s FOMC meeting amount to the only significant bit of news-flow with potential to overturn trend next week. In the unlikely event that the committee sounds profoundly more hawkish, the US unit will find new vigor. More probably however, a cautious stance will lead to deeper losses.