Will the greenback recover the week ahead?

After posting the biggest quarterly declines since 2010 many investors are questioning whether the dollar will finally attract some bulls.

Although last week was quite with regards to the economic data releases, central bankers rattled global financial markets. Governors of the European Central Bank, Bank of England and Bank of Canada all sent similar signals indicating that the era of cheap money is getting closer to an end. Investors took the opportunity to adjust their position in FX markets by dumping the USD and sending the single currency to a 14-month high, the cable above 1.3, and the Canadian Lonnie to a multi-month high despite the fall in oil.

What seemed to be a coordinated action by monetary policy makers, the speeches impacted fixed income and equity markets heavily sending bond yields higher and stocks lower. Going forward I expect to see volatility returning during the process of normalization as monetary policies converge.

Fed Minutes

The Fed will release the minutes from its June 13-14 meeting on Wednesday. Most Fed speakers remained confident despite recent economic data falling short of expectations, especially that inflation continued to undershoot the 2% target. This led to the divergence in interest rates expectations as most market participants believe that four rate hikes along with the reduction in the Fed’s balance sheet is far from reach. I believe that the Fed statement will sound more cautious than Chair Janet Yellen’s press conference on June 14 as some Fed members might show different opinions in the economy’s strength, leading to continued weakness in the USD.

NFP

Friday’s non-farm payrolls report is of more importance I believe and will be a critical test to the USD. The charts are already showing oversold signals on the USD but this requires a fundamental catalyst to convince the bulls to return. The 138,000 jobs added to the economy in May came sharply below the expected 185,000. Wage growth also disappointed with average earnings rising 2.5% annually. If the jobs report managed to surprise to the upside this time, the USD will likely find a near-term bottom. However, the headline figure won’t be enough even if it came above 180,000. Wage growth is what’s needed to narrow the disparities between the Fed’s dot plot and the markets own dot plot.

U.S. manufacturing and service reports

Manufacturing data from the U.S. and other major economies are also on the calendar the week ahead. U.S. durable goods dropped 1.1% in May as new orders fell unexpectedly. The report added to the growing concerns that manufacturing in the U.S. might not be moving in the right direction. Although Monday’s ISM Manufacturing report isn’t considered a tier one release, I think at this stage it’s important to monitor all data coming out from the U.S. ISM Non-Manufacturing PMI will follow on Thursday with an expectation to drop slightly from 56.9 to 56.6.