US Dollar Tumbles on Disappointing NFPs, but is Reaction Overdone?

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US_Dollar_Tumbles_on_Disappointing_NFPs_but_is_Reaction_Overdone_body_Picture_1.png, US Dollar Tumbles on Disappointing NFPs, but is Reaction Overdone?

Fundamental Forecast for US Dollar: Bullish

A sharply disappointing US Nonfarm Payrolls report left the US Dollar lower against the Euro and broader major forex counterparts, but was the reaction overdone? Here are the factors we’re watching for the week ahead.

US economic data has mostly been supportive of Dollar strength, and the coming week brings a two key data releases that will shed further light on the economy and by extension clarify outlook for the USD. We’ll watch US Advance Retail Sales and Consumer Price Index inflation results as well as speeches by a handful of US Federal Reserve officials to paint a clearer picture for the Greenback.

Why was December labor market data such a disappointment? It stands as an outlier as earlier-week ADP Employment Change results were sharply better than expected, while a similarly important ISM Non-Manufacturing Employment Index saw noteworthy improvement in December.

Regardless of the reasons the reaction was clear: US Treasury Yields saw their biggest single-day decline since the Federal Reserve delayed the so-called “Taper” of Quantitative Easing purchases in September. The Dollar likewise fell sharply, and interest rate futures showed the largest daily drop in implied yields since the same Taper disappointment.

Already two Federal Open Market Committee officials—Jeffrey Lacker and James Bullard—have said that the single NFPs print should not be major cause for concern. Bullard went as far to say that he predicts the FOMC will continue to taper QE in future meetings. And though he is not currently a voting member, he is known as a moderate voice within the committee and we may see other officials take a similar stance on the substandard labor data.

To that end it will be interesting to listen to scheduled speeches from current FOMC voters and known hawks in Charles Plosser and Richard Fisher. We suspect they will continue to call for further Fed tapering, but the specifics of what they say might likewise prove significant.

One bad data print doesn’t make a trend, and indeed we can’t say that the US Dollar recovery is over. Our Senior Technical Strategist highlights important price levels for the USD versus the Euro, British Pound, Japanese Yen, and other important counterparts.

The general sense is that the Greenback could continue higher, but there are significant hurdles that prevent us from feeling real conviction in forecasts for US Dollar strength. The coming week of economic event risk could help the Dollar overcome those hurdles and bring further clarity to major currency outlook in the first month of the New Year. – DR

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