February 29

Pivotal Week for Dollar Bulls

The US Dollar rallied sharply on Friday after Preliminary Q4 2015 GDP data came in above estimates, showing a result of 1.0% vs 0.4% estimated. This came on the heels of better than expected core durable goods orders reporting a 1.8% actual against a 0.2% projected. Unemployment claims were in line with expectations at 272k. Stakes have been high for economic data this year as global markets are depending on the United States to remain the only bastion of growth. Sentiment became very pessimistic in January, but economic data has been stable and risk assets have been in recovery mode since posting lows in early February.

The upcoming week is pivotal for FX markets and the long term Dollar bullish trend. Three top tier data points will likely determine how the Federal Reserve will adjust it’s statement at the March 16th FOMC meeting. Tuesday will see ISM Manufacturing data after last month’s number showed a 48.2, barely missing estimates of 48.6. The manufacturing sector has been in contraction for three straight months as cuts in oil & gas investments weigh.  Thursday will reveal ISM Services data after last month’s report missed badly and sparked a substantial wave of Dollar selling. The January report was 53.5 versus a projection of 55.1. This month’s PMI is actually expected to be in contraction territory at 49.8. This will be a key release as the steady services sector has been carrying the economy while America’s relatively small manufacturing sector in contraction.


Employment data on Friday will cap off the week after last month’s mixed report failed to deliver a decisive signal for the Dollar. Job creation of 151k missed the 190k estimate last month, but wage growth was strongest since May of 2015. Last week’s impressive gains in Core PCE will create heightened expectations of continued increases in wages that will be a big factor in determining the Fed’s next move. The last Fed meeting revealed that the FOMC was mostly concerned about recent volatility in financial markets and not so much progress of the economic recovery saying that officials “agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook,”. Their commentary on inflation looks a bit less appropriate after the recent hotter than expected core PCE, with the meeting minutes saying “A number of participants indicated that, in light of recent developments, they viewed the outlook for inflation as somewhat more uncertain or saw the risks as being to the downside,”.


The Dollar has seen very mixed performance so far this year, being more driven by risk appetite than interest rate differentials. As risk aversion has subsided in February, it will become more important to follow economic data and the storyline of the United States avoiding a recession in 2016. If this trend continues expect further gains in the Dollar alongside consolidation trading for equities. In this scenario the greenback would see most gains against the Euro and Yen.