US dollar forecasts for the week ahead with a look at the fundamental economic calendar and a detailed look at the following pairs: GBP to USD, EUR to USD, NZD to USD, AUD to USD and USD to CAD.
The US dollar remains dominant against a spectrum of currencies but this dominance could be tested by a number of data points this week.
What remains of prime interest though is the bleeding in the GBPUSD exchange rate - will it continues or will relief be on offer?
If so, and after five consecutive weeks of decline, where and when will the relief rally take place?
"Personally the buying of the EUR/GBP is playing havoc with both the EUR/USD and GBP/USD at the moment. I think this pair has 1.40 written all over it, but at the same time how many down days in a row can we see. Its about 10 in a row at the moment," says Scott Pickering a professional trader with over 20 years experience in the banking and finance industry.
Pickering does not think that the selling pressure will stop until we see a move back above 1.45.
Watch American Inflation
A potential trigger for a turn-around in sterling-dollar would be a weaker-than-expected US inflation read due on Wednesday.
Higher-than-expected inflation would mean the US Federal Reserve would have to potentially raise interest rates more agressively in 2016 - a scenario that is bullish for the US dollar.
A rise to 0.8% year-on-year is forecast from 0.5% previously, and 0.0% from 0.0% previously month-on-month.
TD Securities expect higher food inflation to partially offset falls in energy, saying in a note that:
“Disinflationary forces tempering prices are expected to continue building in December.
“Rising food prices should provide a partial offset to the drop in energy prices and the lagged impact from the strong USD.
“Core should outperform headline on account of weak core commodity prices and favourable base effects should result in an acceleration of annual CPI inflation.”
CPI will also impact on the outlook for further tightening by the Fed.
Watch Average Weekly Earnings
This is something the Fed are closely monitoring, since it remains unaccountably low despite a tightening labour market.
Higher wages will mean a greater chance of inflation and the Fed continuing with their tightening trajectory, so many market watchers will be tuning in to Real Average Weekly Earnings in December, released on Wednesday, with the 1.6% result in November to beat.
Into The End of The week
On Thursday (Jan 21st) the Philadelphia Fed will release its activity index with -0.9% expected from -5.9% previously.
There will also be Initial Jobless and Continuing Jobless Claims.
DOE Crude Oil Inventories, will likewise be released with the possibility of further volatility in oil prices resulting.
Friday then sees the publication of U.S Manufacturing PMI which is forecast to come out at 51. 8 from 51.2 previously.
There is also Leading Indicators and Baker Hughes Rig Count (Jan 21).
View of the Charts
Euro to Dollar Exchange Rate Forecast – More Upside on the Cards
The pair continues to consolidate in a relatively tight, down-sloping range ever since the spike higher following the ECB December meeting.
The Chaikin Money Flow Index is showing underlying strength in the consolidation which lends a bullish bias to the outlook.
I see the exchange rate eventually breaking out of the range, and unfolding in a ‘C’ leg of an A-B-C corrective pattern, which began with leg A after the December ECB meeting.
The C wave should at the very least reach the 61.8% Fibonacci extension of wave A, which indicates an expected target of 1.1260.
There are several layers of resistance in the way, however, including the 50-week MA right under it at 1.1041 and the 200-day MA only 3 points above at 1.1044.
It’s important the exchange rate decisively breaks above these levels for confirmation of the up-trend extending higher.
Such a break would probably come from a move above 1.1115, which would confirm an extension up to the aforesaid 1.1260 target.
Pound to Dollar Forecast – Looking Oversold
The GBP to USD pair has broken down below the S1 Monthly Pivot and the lower border of a falling wedge pattern.
It has since sold off heavily to its current level in the 1.43s.
The chart's Relative Strength Index (RSI) is oversold and this indicates the down-trend may be 'long in the tooth.'
The bearish move post-breakout from the wedge has fallen beyond its minimum expectations, at the 61.8% Fibonacci extension of the height of the wedge.
This is further indication the pair may be oversold.
Ideally RSI should move back above 30 before opening any more short trades.
Nevertheless, a break below the 1.4290 level would probably see a potential move lower to 1.4200.
Australian to US Dollar Forecast: Could Still Move Lower
The Aussie has surpassed its target calculated by extrapolating the height of the triangle by 61.8%.
It has also breached below the September ’15 multi-year lows.
The pair could still move even lower despite having achieved the minimum price expectation.
MACD also continues to signal further downside by thrusting steeply down below the zero-line.
A break below 0.6840 would provide confirmation of a continuation lower, to a possible end target at 0.6775, just above the 100% Fibonacci extension of the height of the triangle.
NZD/USD Forecast: Looking Oversold
The pair has completed an A-B-C correction in the midst of a strong down-trend, and has recently broken lower, resuming its longer-term down-trend. (Read our NZ dollar week ahead view here).
The downside break has reached its minimum price target at the 61.8% projection of the move prior to the trend-line break.
RSI is oversold indicating that there is a lessening probability of further down-side extending lower from here.
Nevertheless a move below 0.6350 would probably be confirmation of a very strong move lower, which would be expected to reach the 100% target at 0.6300.
USD/CAD Forecast: Relentless Uptrend
The pair continues its relentless up-trend.
It broke above the R1 Monthly Pivot and has now gone to 1.45 where it has encountered resistance from the R2 Monthly Pivot, and has pulled back.
The measured move, which I have drawn on as an A-B-C pattern has completed since A now equals C, and this could be a sign the pair could be ready for a pull-back.
RSI is showing the pair is overbought on all timeframes.
Given overbought conditions and the completed measured move, I would urge caution to bulls, however, the overarching fact remains that the pair is in a strong up-trend.
On Balance Volume, for example is strengthening in line with the trend, showing conviction in the buying.
Ultimately a break above the 1.4550 level could well move all the way up to the 1.48s eventually, although any of the round numbers on the way are potential selling spots.