Will the dollar appreciate despite soft US macro data?

In the US, incoming economic data has been rather weak recently. Both employment and inflation figures have been soft this month. Today we had weaker-than-expected readings on building permits and housing starts, while the UoM Consumer Sentiment also missed the mark. The dollar weakened but didn’t fall of a cliff. That may be because of what the Fed had announced on Wednesday: that the soft patch in economic data is transitory and that this won’t stop the central bank from tightening its belt further. What’s more, a dovish Bank of Japan and European Central Bank has helped to support the dollar with USD/JPY and EUR/USD showing possible reversal signs in their respective bearish and bullish trends. Thus, the dollar may be able to appreciate despite the weakness in US macro figures. However if things start to turn ugly then market participants may price in the possibility that the Fed may actually be wrong in its forecasts about the US economy. For now though, investors are giving the Fed the benefit of the doubt – only just.

But after a busy week of fundamental events, next week is set to be a quieter one in terms of economic data. There is however one more key central bank meeting to look forward to as the Reserve Bank of New Zealand makes its policy decision on Wednesday, albeit no change is expected to be announced. Eurozone PMIs will be among next week's key data, due on Friday. From North America, Canadian retail sales (Thursday) and CPI (Friday) are among the highlights, while in the US there's nothing significant scheduled apart from a few second-tier macro pointers here and there.

The Dollar Index managed to form a potential reversal pattern following a hawkish Fed meeting on Wednesday. It created a hammer candlestick pattern at around the 61.8% Fibonacci retracement level after the break below the prior low at 96.50 proved to be a false move. So we may have seen a reversal pattern unfold for the dollar index, similar to what had happened at the turn of the year at around 103.55, which marked the end of the dollar rally. However if the DXY were to hit a new low on the year in the coming days then all the bullish bets would be off.