US Dollar: Week of Weakness or Week of Recovery?

The US dollar has experienced a massive sell-off after the Federal Reserve refrained from reduction of monetary stimulus and, especially, after US politicians failed to agree on a budget, leading to a government shutdown. Can the greenback recover this week?

The major event over the week is the Fed policy meeting. Previously, it was widely accepted that the central bank is going to taper quantitative easing. Of course, the budget issues made such move highly unlikely this year, not to mention this week. Yet traders will carefully watch the wording of an accompanying statement, attempting to discern plans of policy makers.

Macroeconomic data should help to assess probability of monetary tightening. The Fed will likely continue to watch employment data. Without non-farm payrolls (which are postponed again) the report from Automatic Data Processing will guide Forex market participants. Last month’s reading was disappointing and even less impressive growth by 151,000 is expected in this month’s release.

Among other important releases will be inflation data and unemployment claims, both of which are expected to show positive developments. On the other hand, the Conference Board confidence index will demonstrate a noticeable drop according to analysts’ projections. Not a surprise, really, after all the bad news that have came out of the USA (and may happen yet again as the budget crisis was just delayed, not resolved).

Another important piece of information is housing data, which was already released and it has really frustrated investors, showing an unexpected slump of pending home sales. Yet the dollar did not react to it in a negative way, surprising some economists. Why the US currency does not want to go lower under such unfavorable circumstances? Perhaps, the greenback is already too low and should correct after the massive break it has demonstrated. It is not normal for a currency to move for a long time in one direction without occasional pause or even short-term trend reversal.

Indeed, experts do not believe that the dollar is going to fall lower, at least not this week. Forex Crunch expects the greenback to gain against most major currencies, including the euro, but excluding the yen (against which the dollar was moving basically sideways for the most part of this year). DailyFX is more cautious, issuing a neutral outlook. The main reasoning for such predictions is that all the negative factors that are known have been already priced in and it is not wise to expect further decline without additional reasons.

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