US Dollar Forecasts Post-Fed: Strength Will Return
We asked a number of analysts what they thought the outlook held for the US dollar exchange rate complex in the wake of the decision not to raise interest rates at the US Fed this September.
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The importance of interest rates to currency values remains incredibly important and it comes as no surprise that FX projections ultimately rely on expectations concerning future FOMC decision making.
However, when taking a long-term view the picture is actually quite simple: The US economy is strong and the dollar should retain a positive bias.
At the time of writing the pound to dollar exchange rate is testing fresh monthly highs around 1.5523 after the USD ceded ground.
The euro to dollar exchange rate is meanwhile looking intent on testing 1.15.
Near-Term Weakness Could Continue
Yesterday’s Fed decision is a positive for the pound to dollar exchange rate as GBPUSD has been able to add to the impetus provided by positive UK economic data.
“We think there is room for some modest near-term USD softness as the market adjusts to a more cautious Fed. Long USD positioning is vulnerable over coming days and perhaps weeks,” says a client note issued by Morgan Stanley concerning the immediate prospects facing the US Dollar.
EUR/USD is also moving higher, but there are some hefty hurdles to negotiate:
“The pair has broken hourly resistance at 1.1438 (01/09/2015 high) before bouncing back. Strong resistance lies at 1.1714 (24/08/2015 high). Strong support can be found at 1.1017 (18/08/2015 low),” says Yann Quelenn from Swissquote Bank in Gland, Switzerland.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3359▲ + 0.25%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2905 - 1.2958 |
**Independent Specialist | 1.3172 - 1.3225 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
More of the Same: Familiar Ranges
Lloyds Bank meanwhile see nothing to get excited about and are therefore forecasting more sideways action in the US dollar complex:
“While the USD is at risk of follow through selling in the near term, there is little reason to believe we should move out of recent ranges. This should see volatility reduce and while the natural reaction is to move to carry trades in such periods, the higher yielding currencies are still susceptible to risks around China.
“After strong wage data earlier in the week, the GBP should benefit from the FOMC remaining on hold in the short term which can see GBPUSD grind up towards the 1.5750-1.5900 range highs.”
Longer-Term: The Dollar Should Advance on a Strong Economy
Forget the US Fed and focus on the strong fundamentals underpinning the US dollar’s outlook argue Morgan Stanley who cut through the complexities of FX analysis and suggest we focus on the basics.
“Our framework is built on the reduced investment attractiveness in much of the rest of the world. EM overcapacity, deleveraging and competitiveness concerns remain. And the commodity bloc still faces knock-on effects of much weaker terms of trade,” confirms the investment bank in a weekly exchange rate forecast briefing.
That the FOMC stated global developments as a primary justification to wait longer shows just how challenged the outlook is for much of G10 and EM.
The ‘Great Repatriation’ of US private sector investment should continue, in Morgan Stanley’s view, underpinning USD over the medium term.
Morgan Stanley say they forecast the pound to dollar exchange rate to fall to 1.54 at the end of the year, 1.53 at the end of the first quarter of 2016 and 1.52 by mid-year.
The euro / dollar rate should fall towards 1.13 by year-end and 1.11 by the March 2016 before a low of 1.08 is reached by mid-2016.
GBP/USD is pushing higher and has broken the resistance implied by the upper bound of the uptrend channel. Hourly resistance at 1.5509 (27/08/2015 high) has been broken and hourly support is given at 1.5330 (15/09/2015 low).
Stronger support is given at 1.5165 (04/09/2015 low). • In the longer term, the technical structure looks like a recovery bottom whose maximum upside potential is given by the strong resistance at 1.6189 (Fibo 61% entrancement).
