FX Forecast - US Dollar Drops after US Growth Data

On Monday the US Dollar edged lower against a number of its rivals as the US Services PMI printed below expected levels. Although the report did inspire a softening in the ‘Greenback’ due to the impact it may have on the Federal Reserve’s interest rate outlook, there were positives to be drawn from it. Markit economist Chris Williamson said of the result; ‘Although the manufacturing survey showed signs of exporters struggling in the face of the Dollar’s appreciation, the resilient strength of domestic demand reflected in the services survey will help reassure policymakers that the economy remains buoyant. The surveys also indicated that inflationary pressures are reviving, with charges for goods and services rising at the fastest rate since last September.’

The US Dollar posted further declines against peers like the Euro and Pound on Tuesday after the gauge of US Consumer Confidence defied forecasts for improvement and instead slumped to its lowest level since the close of last year. With sentiment on the decline, the US labour market faltering and even the bullish services sector showing signs of weakness, the odds of the Federal Reserve following through with its original plan of increasing interest rates in the summer of 2015 have fallen dramatically. On Wednesday the US Dollar’s declines were cemented as the US economy was shown to have expanded by considerably less-than-expected in the first quarter of 2015.
In the view of industry expert Jim O’Sullivan; ‘We believe weakness was grossly exaggerated and there will be significant catch-up in Q2, but, of course, that remains to be seen. Apart from fundamental slowing and normal volatility, possible factors include harsher-than-usual winter weather, port delays and seasonal adjustment problems relating to Q1 specifically. More fundamentally, lower oil prices account for the plunge in the mining component of business investment in structures, although we think the positive effects of lower oil prices will ultimately offset the negative effects.’

Before the close of the North American session the US Dollar is likely to experience additional movement as a result of the Federal Open Market Committee announcement. Should the Fed shock everyone and adopt a hawkish tone during its statement the US Dollar could recover, but a dovish tone (which is expected) will push the US Dollar lower still.