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US dollar at a crossroads amid economic data deluge

The recently oversold US dollar has generally been on the rebound since late March against some of its main rivals, most notably the euro. This increased support for the dollar has been driven mostly by a combination of technical factors, a stream of positive US economic data, and a subtle shift in Federal Reserve officials towards slightly more hawkish rhetoric.

Despite this modest boost since late March, the dollar remains vulnerable, as always, to the vagaries of the Fed and the critical economic data that drives its policy decisions.

Political considerations, especially with respect to the increasingly uncertain outlook for the Trump Administration’s policy plans, also play a key role in the dollar’s direction. In the end, however, any political impact on the dollar is ultimately reflected in the economic data trends that result.

Later this week, President Trump will have a critically important meeting with Chinese President Xi Jinping, in which the sensitive and potentially market-moving topics of trade imbalances and currency valuations will likely be discussed.

The Fed

On the US domestic front, this week provides a solid glimpse into how the US economy is unfolding as the new administration continues to settle-in and the Fed continues to waver in its policy outlook. While the interest rate hike in March was a clear signal of the Fed’s intention to follow a policy-tightening path, the somewhat dovish FOMC projections for further rate increases has put into question the extent and magnitude of that path.

On Wednesday, minutes of March’s FOMC meeting will be released. These minutes will be closely-scrutinized by the markets in attempts to glean more clues about the Fed’s outlook for the economy and interest rates going forward.

US Economic Growth

Key data events this week for the dollar include the ISM non-manufacturing (services) PMI data for March that will also be released on Wednesday. The headline number is expected to be around 57.1, well in expansion territory, after the previous month’s better-than-expected 57.6 reading. The employment component of this data will also be of critical importance, as it provides a strong indication of the overall jobs environment in the US. The services sector PMI is even more closely-watched than that of the manufacturing sector, which was already released on Monday. The ISM manufacturing PMI data was reported in-line with expectations at 57.2, also well in expansion territory, but its employment component was more impressive at 58.9, showing a substantial acceleration of growth from the previous month.

US Jobs

On the US jobs front, which is among the greatest concerns for the Fed, the US Labor Department’s official jobs report will be released on Friday. This will include the heavily-anticipated non-farm payrolls (NFP) data. Current expectations are for around 175,000 jobs added in March, after February’s stellar 235,000 outcome. Prior to Friday’s official jobs report, Wednesday will bring the ADP private employment data, which can often change expectations for the NFP, as was the case last month. In the event of another solid or better-than-expected jobs report, the Fed could be pressured even more to accelerate its pace of policy-tightening.

Dollar Strength

So where does all of this leave the US dollar? As always, dollar direction is considerably at the mercy of whether or not the US economy continues to show a strong trend of improving growth and employment as reflected in the data. Our projections indeed lean towards a continuation of this positive trending in the US economy for the near-term, as well as sustained progress overall in US economic data. Barring any substantially negative surprises, this scenario should support the potential for accelerated Fed tightening and further strengthening for the dollar going forward, particularly against the backdrop of serious pressures faced by both the euro and pound.

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