Weekly Forecast for the Dollar

The USD last week closed lower proving to be last week’s weakest major currency as the US Q2 GDP data might have resulted in a drastically reduced chance of a September rate hike. The USD was not alone as the CAD followed a similar path through the week on the trail of weak crude prices falling to almost 41.38, strengthening the idea that a correlation exists between energy prices and the currency. However the JPY to the dismay of the Bank of Japan and the Japanese authorities was seen much stronger, ending the week as the strongest major pair propelled by the BoJ’s inability to please the market.

The Australian Dollar and the Kiwi Dollar joined the yen in its uptick as the trades taken on speculation surrounding the RBA began to decline, the market now looks forward to another wonderful week with a Bank of England and Reserve Bank of Australia meeting. The US will be releasing the most traded fundamental event; the Non-Farm Payroll report and their ISM indices.

After the release of US GDP Data, the Fed fund futures was valued with a 12% chance of a September Fed rate hike, and a 33% chance of a hike in December. The GDP for the second quarter showed a 1.2% growth which is rather small when pit against the analysts estimate that was set at 2.6%.

"There's definitely a data stream that could come through in the next couple of months that I think would be supportive of two rate increases." San Francisco Fed president John Williams stated in a bid to downplay the significance of the released data.

"We're still hopeful for solid GDP growth this year, and the basis for that is the consumer." Dallas Fed president Rob Kaplan stated further adding that he wouldn't "overreact to one data point". With the Q2 GDP failing to calm the troubled waters the dollar currently sits on, the NFP data due this week will decide the next move for the dollar.

Earlier last week, the FOMC voted to maintain the previous rate of the Fed Funds in a high majority 9-1 vote. Meanwhile, policymakers showed a more hawkish side as they cited increased household spending and a stronger labour market. They also mentioned that near term risks to the economy have fallen significantly, as they showed a lot of concern for inflation and its expectations.

The Fed also hinted at a rate hike later this year, leaving a strong chance of a September rate hike, a more definitive signal for a hike will likely be found at the Jackson Hole Symposium on the 26^th of August.

Quoting the Strategist Hans Redeker; "Hence, we regard the recent rise in real US yields that has supported the 4% USD rally seen since May as unsustainable."

A long-held framework utilized by Morgan Stanley suggests that a mixture of high global debt, capacity overhangs and resulting low returns on investments could keep deflationary pressure at bay for the USD.

In a weekly client brief Morgan Stanley say they see the USD “looking south” from here saying that the Fed had less to gain by hiking rates early, this shows that many investors still expect the USD to weaken further.