Though price action for the world’s reserve currency remained extraordinarily volatile this past week; the heightened activity wouldn’t translate into direction. Aside from the Japanese yen, the dollar’s exchange rates with its major counterparts were ultimately little changed from the previous Friday’s close, reflecting a general lack of market-moving economic data and a tempered interest in risk appetite as the G8 deliberated on the path the world’s financial leaders will take in tending to the global recovery.

US Dollar Looking For a Catalyst to Break Congestion

Fundamental Outlook for US Dollar: Neutral

- G8 says recovery is ongoing, not yet time to withdrawal financial aid
- Consumer confidence drops for the first time in five months
- IMF upgrades its economic forecasts for the US and global economies

Though price action for the world’s reserve currency remained extraordinarily volatile this past week; the heightened activity wouldn’t translate into direction. Aside from the Japanese yen, the dollar’s exchange rates with its major counterparts were ultimately little changed from the previous Friday’s close, reflecting a general lack of market-moving economic data and a tempered interest in risk appetite as the G8 deliberated on the path the world’s financial leaders will take in tending to the global recovery. Looking ahead, the dollar will start the new week in a relatively tight range with its most liquid pairings, looking for the fundamental spark that can encourage a breakout and reignite a trend. What could be that motivating factor? There are more than a few notable indicators populating the docket, fine tuning forecasts for the pace of recovery; but as usual, the true driver will likely come through sentiment and risk appetite.

Over the past month, risk appetite has leveled off and is even threatening to retrace the rally in optimism that began back in March. There are two considerations here for those trading the dollar. First, determine what is will drive sentiment; and then determine how the greenback will respond to the shift. It shouldn’t come as a surprise that the currency’s reaction will depend on what is moving the market. Should the global financial markets be thrown into panic, the dollar will take on the title of safe haven. On the other end of the scale, if there is a broad recovery in investor sentiment, it will be a more discriminating scale. Looking out over the coming week, there are few critical events scheduled – but this sort of thing usual comes out of the blue. More likely, the market’s bearing will feed off bigger trends. Carry over from the G8 meeting over the second half of this past week has increased the rivalry to be the first country to see positive growth and financial stability. In its comments, the group suggested there were early signs of economic “stabilization,” yet there were still hurdles and the commitment would remain with “fiscal sustainability.” This has been the motto for a few months now which only further breeds speculation. Should the calls to recapitalize “viable” banks and deal with distressed debt be taken seriously, the US is already ahead of the curve. However, beyond the short-term, America’s budget deficit dwarfs most of its counterparts; and policy officials remained staunchly opposed to moving on to the next step for a recovery – the government’s graceful exit from the financial markets.

But, when the financial seas are quiet and speculation over some other region is accelerating its exit strategy is settled, the fundamental crowd will turn back to benchmarking the United States’ relative pace of economic recovery. It is important to remember that it doesn’t necessarily matter how quickly one economy returns to positive growth or its pace thereafter. What is important is whether the US is going to pull itself out of recession and push up the throttle on expansion before its global counterparts. For this purpose, we have a slew of economic releases filling out the economic calendar. The most encompassing report to cross the wires will be the FOMC minutes. While their multi-year growth and inflation forecasts are not expected to be updated until the minutes released in August; this will nonetheless provide the short-hand version of their opinion on growth and financial markets. Less comprehensive – but more likely to stir volatility – are advanced retail sales, industrial production and housing starts. These three indicators will offer a status report on three of the most essential regions of growth. Also, though it may be under the radar, an eye should be kept on the monthly budget. The government’s ability to fund its stimulus efforts and the amount of debt they ultimately take on are critical at this point.  – JK

Written by John Kicklighter, Currency Strategist   dailyfx.com