US Dollar Sets Stage For Major Gains In April And Second Quarter

By David Rodriguez, Quantitative Strategist

Fundamental Forecastfor the US Dollar: Bullish

The US Dollar (ticker: USDOLLAR ) started the month of April and the secondquarter with sharp gains against the Euro and other keycounterparts, setting the stage for a major reversal through thecoming weeks and months of trade. The Dow Jones FXCM Dollar Indexwould have finished near 8-month highs, but a considerablyworse-than-expected US Nonfarm Payrolls sunk the high-flyingGreenback. An important jump in forex market volatilityexpectations suggests the coming week could be similarlyeventful.

Fundamental event risks drops significantly in the days ahead, but volatility may remain elevated all the same. Any especially large surprises in Friday’s US Consumer Price Index inflation figures could drive important US Dollar moves. Yet this past week showed that traders were more than willing to force big EURUSD moves even in the absence of event risk. Just this week we saw a surprisingly hawkish US Federal Reserve send the US Dollar sharply higher, but a disappointing Nonfarm Payrolls result brought the currency back to Earth. Ultimately, do either events represent a true “game-changing” piece of news? Not in this author’s opinion.

The Federal Open Market Committee (FOMC) Minutes from March’s rate decision showed no strong mention of further monetary policy easing, and traders immediately sent US yields and the domestic currency higher. Yet FOMC rhetoric is one matter and what voting members will ultimately decide is another. In other words: the FOMC minutes represent the opinion of a broad range of Regional Fed presidents and other officials. The voting committee is a much smaller group, and on the whole the voting members seem more dovish than the majority.

What of US Nonfarm Payrolls results? Domestic jobs growth literally halved in the month of March and the US Dollar tumbled on the data release.Yet the report wasn’t all bad: the unemployment rate droppedand Average Hourly Earnings grew by more than expected on ayear-over-year basis. The result was definitely a disappointment inlight of several strong months of data, but we would need to see amore consistent turn lower to claim that March data points to asignificant deterioration in labor market conditions.

Markets clearly remain quite sensitive toeconomic data surprises, but we’re not convinced that thenext big US Dollar move will come on any one data release. Insteadwe wait patiently for a USDOLLAR test of significant 8-month highs andmulti-year trendline resistance at 10,134.

The Dow Jones FXCM Dollar Index looked asthough it could break higher, and indeed we called for amajor US Dollar turn higher against the Euro on a major shift in forex sentiment . If the Euro strengthens significantly and theUSDOLLAR drops below important congestion support at 9,900 we wouldhave been proven wrong in our forecasts. Yet the Greenbackstrengthened through the first week of the month and quarter.Nothing’s guaranteed, but price action in the beginning of aperiod often sets the pace for later moves. We like the US Dollarhigher and would grow further bullish on a USDOLLAR break above 10,134 . - DR
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/forecast/weekly/usd/2012/04/07/US_Dollar_Sets_Stage_for_Major_Gains_in_April_and_Second_Quarter.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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