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US dollar outlook: October 20-24

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US dollar outlook: October 20-24

The US dollar declined 1 percent this week as evidence came to light the budget impasse cost the US economy $24 billion. Bipartisan Senate leaders reached an accord Wednesday that ended the 16-day partial government shutdown. The new deal promises to fund the government through January 15, 2014 and raise the debt limit through February 7.

Several analysts and market participants have downgraded their outlook on the US dollar. For the millions of global investors trading greenbacks, the following is a short guideline of what to expect next week.
Economic Data

Suspending the flow of economic data was one of the biggest impacts of the budget impasse. The economic data help market participants navigate the US economy and determine the likelihood of a shift in monetary policy. Now that the impasse has been lifted, several batches of economic data will make headlines next week, including delayed reports from the Labor Department and Census Bureau.

The biggest report to come our way next week will be the September nonfarm payrolls. The US economy is expected to have added 180,000 nonfarm payrolls last month, according to a median estimate of economists surveyed by Bloomberg. A higher reading will likely propel the US dollar higher. The payroll data will be accompanied by average earnings and the September unemployment rate.

In addition to the Labor report, the Census Bureau will release data on new home sales and durable goods orders. As investors shift their attention back to the data, better-than-expected readings will help the greenback retrace this week’s losses.

Monetary Policy

An active data pipeline will feed directly into speculation over monetary policy. Market participants will monitor the economic reports carefully to determine whether the Federal Reserve will begin curtailing the $85 billion in monthly asset purchases. Better-than-expected results will raise expectations for an imminent cut to monetary easing.

Market participants are increasingly shifting their expectations toward monetary policy. The government shutdown shaved at least 0.6 percent from fourth quarter GDP, according to the S&P Rating Service. The downward pressure on the economy makes a bond taper at this time less likely. The Federal Open Market Committee meets October 29-30 for the second last time this year.

The Peers

GBP/USD: The British pound surged two cents against the dollar after Congress ended the first government shutdown in 17 years. The pound was further supported by strong retail sales and declining jobless rates, the Office for National Statistics showed. At week’s end, the GBPUSD was still in the midst of an ascending structure, which suggests the pair may consolidate in the low-to-mid 1.61s before pulling ahead toward the 1.63 handle. A stronger-than-expected US jobs report could foil the upward momentum.

EUR/USD: Growing selling pressure for the US dollar is keeping the euro well supported. The EURUSD closed Friday’s session around 1.3866, a gain of 14 pips. The technical indicators show the pair erased its overbought readings, which means buying interest for EURUSD should continue. The pair’s support levels are 1.3595/28; on the upside, resistance forms ahead of the psychological 1.38 level. The euro will remain well supported next week so long as investors are convinced the Fed won’t taper bond purchases this year.

USD/CAD: The USDCAD ended the week down 70 pips. The upside momentum surrounding the North American pair is shrinking, with the Canadian dollar benefiting from the diversification of global foreign exchange reserves. A fall below 1.0250 signals the US dollar is in trouble. The pair could breach this price point should US data fail to meet expectations.

USD/JPY: The pair remains glued below the 98.0 line, after falling almost 100 pips on Thursday. The US dollar will likely remain lower against its Japanese counterpart so long as investors believe the Fed will continue to ease at its current rate. However, a strong trading bias for USDJPY is unnecessary so long as the pair remains range-bound (96.6-99.0).

For the first time since the government shutdown, the direction of the US dollar will depend largely on the data flows, and whether market participants can expect changes to monetary policy before Janet Yellen takes the chair at the Federal Reserve.

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