The US dollar may not be ready to roll over just yet: The Week Ahead

Movements of the US dollar following soft US CPI data has been the highlight for traders this week, which saw the US dollar index endure its worst day of the year on Wednesday. Yet with key levels of support holding around 104, dip buyers appear to be taking advantage of what appears to be a vanilla trendline trade; buy the dip around the trendline. Besides, we know that futures traders were heavily net long the dollar just one week ago, so perhaps this recent pullback will be seen as a decent buying opportunity by funds at better prices.

Unfortunately, we’ll have to wait until next Friday’s COT report to see just how many of the US dollar bulls were shaken out of their longs. But as we head into next week I suspect there could be some upside potential for the greenback.

FOMC minutes and Fed speakers are the main events for the US next week, although it is debatable as to how much volatility they will generate. On that same token, less data means less chance of bad data surfacing to push the dollar lower. So we may find that volatility is on the lower side, and that can often allow markets to retrace against their prior move. And in this case that could support the US dollar next week. 

The week ahead (key themes and events):

• FOMC minutes, Fed speakers (Powell, Barkin, Bostic)
• US earnings (Nvidia, Target)
• UK inflation
• Flash PMIs
• RBNZ cash rate decision

The week ahead (calendar):

FOMC minutes, Fed speakers (Powell, Barkin, Bostic)

In all likelihood, the FOMC minutes will reveal little new information to help decipher the Fed’s next move. Regardless, it is one of those events that cannot be ignored. Their last minute reminded us that “members” wanted greater confidence that “inflation is moving sustainably towards 2%”. We know that inflation came in slightly softer and in line with market expectations, but I’d argue it hasn’t come down quickly enough to provide the confidence for the Fed it seeks to signal a cut, as much as traders want them to.

We also have plenty of Fed speakers, but looking through many of the titles suggests they might not be the biggest drivers for market volatility. But like the minutes, traders need to have these on their radar. Just in case.

Trader’s watchlist: EURUSD, USD/JPY, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones

UK inflation:

The BOE’s chief economist said this week that a summer cut could be on the table, although it remains up for debate whether that could be in June or August. Wages remain sticky at 6% y/y, even if unemployment and jobless claims rose whilst job ‘growth’ plunged for a second month. So it could be down to next week’s UK inflation figures as to whether we can expect a cut as soon as June, and whether there is wriggle room for a second 25bp cut before the year end.

Trader’s watchlist: GBP/USD, GBP/JPY, EUR/GBP, FTSE 100

Flash PMIs:

Inflation and employment reports tend to be the main focus for traders when trying to decipher central bank policies (in that order). Yet flash PMIs are a great complement, as the surveys provide a forward look at growth expectations, inflationary pressures and employment trends. And with traders obsessed with if, when and when cuts could arrive, they’ll likely want to short any currency that shows weaker growth potential, employment and lower inflationary pressures present within the flash PMI report. Thursday is a big day for PMI surveys as we’ll see reports for the UK, Europe and of course the US. Australia and Japan kick off last on Wednesday, and sometimes they can provide a lead of what to expect in Europe and the US.

Trader’s watchlist: EURUSD, GBP/USD, AUD/USD, AUD/JPY, USD/JPY, EUR/GBP, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones

US earnings (Nvidia, Dollar Tree, Target)

If we had to pick a single stock that tends to drive the general direction of the US stock market (particularly the Nasdaq 100), it is Nvidia (NVDA). Nvidia’s 20-day rolling correlation sits at 0.84 to show a strong positive correlation. And that means that traders will pay very close attention to their earnings report when it is released on Wednesday.

But traders can also glean consumer sentiment from the Dollar Tree (DLTR) and Target (TGT) earnings reports. If there are signs of weakness in consumer spending or warnings that future earnings are set to suffer, it could be taken as a sign that the economy is indeed slowing, and weigh on yields and the US dollar on bets of Fed cuts.

Trader’s watchlist: S&P 500, Nasdaq 100, Dow Jones, VIX, Nvidia (NVDA), Dollar Tree (DLTR), Target (TGT), US dollar, USD/JPY, gold, WTI, brent

RBNZ meeting:

It is almost a given the RBNZ will not change policy next week, despite the hype of other central banks potentially cutting over the next few months. The RBNZ maintained a slight upside bias for the OCR in February’s forecast, and for it to top at 5.6% at the end of the year and likely only seeing a single 25bp cut in late 2025.

The main thing to look for next week is a revision of their quarterly forecasts to see if the OCR outlook (and of course inflation) has been lowered.

Trader’s watchlist: NZD/USD, NZD/JPY, AUD/NZD

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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