Dollar rate outlook for today: USD rally put on hold for now

On Monday morning we note the USD has seen its newfound strength fade away; however the sense that we could be at the start of a new USD rally dominates FX market chatter at present.

In late morning in London we see the pound sterling to US dollar exchange rate is trading 0.55 pct up on last night's closing level at 1.5964. The euro dollar exchange rate is meanwhile trading 0.15 pct higher at 1.3508.

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US dollar recovery this week?

The dollar rate has witnessed a modest recovery across the board; "however a further squaring of USD short positions may be necessary before we see renewed USD weakness," warn Lloyds Bank Research.

Concerning the headline euro dollar exchange rate we note that the recent selling pressure may have abated.

The combination of low eurozone inflation data fuelling rate cut  expectations and a less dovish than expected rhetoric from the FOMC pushed EUR/USD below 1.35 last week.

A part of the story is position unwinding and we now have the CFTC/IMM data for the week ending 22 October.

The data show that speculators added further to long EUR/USD positions in the midst of the US government shutdown.

"All in all, we believe that EUR/USD still has some downside potential
and we believe that EUR/USD has peaked for now but that we should not expect to see 1.30 anytime soon," says a note on the dollar outlook from Kasper Kirkegaard at Danske Bank.

Boris Schlossberg at BK Asset Management is one commentator who is looking for a resumption of US dollar strength this week:

While the USD may be coming back into favour with many on the FX markets, Lloyds Bank warn, "we still remain bearish the USD. The government shutdown has hampered Q4 growth, and economic confidence and economic activity are likely to remain subdued ahead of US budget talks in January, which suggest QE ‘tapering’ looks unlikely until next year."

While there is perhaps some scope for near-term USD upside, in the medium-term Lloyds remain negative the USD.

Nevertheless, it is a heavy data week from the US this week, with services ISM, Q3 GDP and October's payrolls report. Any positive surprises could well trigger a rally.