Dollar Bears Risk Another Knock-Down If U.S. Data Remain Buoyant

(Bloomberg) -- As the dollar’s best rally since 2016 pauses amid a lookout for fresh catalysts, key U.S. data due in the coming days will be crucial.

The Federal Reserve’s preferred gauge of inflation, payrolls figures for May, first-quarter growth and personal spending are all among economic reports due next week. Should they support expectations for three more Fed interest-rate increases this year, then the dollar could extend its climb to levels that would force bears to throw in the towel on a technical basis.

The Dollar Index has advanced more than 4 percent through April and May, on track for the best two-month run since November 2016. Yet, it has stalled after reaching a five-month high on Wednesday ahead of a Fibonacci retracement level as overstretched short-term positioning called for a correction.

Dollar Bears Risk Another Knock-Down If U.S. Data Remain Buoyant

Dollar bears do have a few things to point out to back their short bias: the twin deficits haven’t gone anywhere, Treasury yields are already retreating, trade tensions are back and U.S. President Donald Trump can still negatively surprise the markets.

Still, this rhetoric may sound more like hopeful thinking for greenback shorts if the U.S. remains a hot investment destination. Recent data have been buoyant and yields could resume their climb following a healthy correction, while equity valuations remain attractive amid strong U.S. earnings. Moreover, the latest geopolitical and global-trade developments may evolve just like the last time round: much noise at first, only to deescalate later.

Euro, Yen

At the same time, the greenback’s main peers are not out of the woods yet. The euro may find little support from the European Central Bank until the July meeting amid Italian political concerns while Japan’s inflation shows stimulus exit remains a far-away prospect.

With emerging markets under pressure, the Dollar Index may close above the 38.2 percent Fibonacci retracement level of its losses since early 2017, which in theory would urge model names and fast-money accounts to chase the market higher.

If, however, the probability of only one more Fed rate hike after the June decision rises, then the U.S. currency may set a short-term top near current levels, suggesting its latest rebound was simply of a corrective nature rather than a trend reversal.

What to Watch:

  • On Monday, May 28, U.S. markets are closed for Memorial Day and U.K. markets for the spring bank holiday
  • European Union trade chief Cecilia Malmstrom and U.S. Commerce Secretary Wilbur Ross are scheduled to meet in an informal World Trade Organization ministerial in Paris on May 30
  • U.S. Fed holds an open board meeting in Washington to discuss changes to the Volcker Rule the same day
  • Policy makers’ speeches include: Atlanta Fed President Raphael Bostic, St. Louis Fed President James Bullard; ECB Governing Council member Francois Villeroy de Galhau, Executive Board members Yves Mersch, Sabine Lautenschlaeger and Benoit Coeure; -Swiss National Bank President Thomas Jordan; Riksbank Deputy Governor Henry Ohlsson
  • Economic releases also include euro-area economic confidence, inflation; U.K. PMI manufacturing; see data calendar

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