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Currency Analyst since 2010

US dollar: forecast for September 14-20

By Elizabeth Belugina

US dollar index showed modest declines in the past week. The greenback declined versus the euro, British pound and Australian dollar, but strengthened against Japanese yen.

 

The highlight of the next week will surely be the meeting of Federal Reserve on Thursday, September 17.

Analysts have high opinion of the US labor market data. Good state of the labor data is the necessary condition for the Fed's rate hike. Although in August jobs gains were lower than expected, the jobless rate dropped to 5.1% level, where the Fed considers the economy to be at “full employment.” For now, the market is pricing in about 30-50% possibility of September rate hike.

If US central bank chooses to tighten policy, it will accompany such action with dovish comments in order to smooth negative impact on stocks. Still, the initial reaction to a rate hike will be certainly very positive for the greenback making it strengthen versus all of its competitors.  

However, the volatile performance of Chinese stocks and the risks connected with that will make it hard for the Fed’s (FOMC) members to reach an agreement on a rate hike. Those who think that the Fed will wait with raising rates argue that the central bank has not raised rates when the CBOE Volatility Index was as high as it is now. At the same time, the Fed does not officially target stocks and does not have mandate to support the stock market. Moreover, the delay in hikes will provoke further uncertainty that can hurt stocks in the medium term even more. If the Fed does not raise rates, US dollar will weaken, but we do not think that it will be a start of a downtrend, especially against commodity currencies.

There are still some figures to look at ahead of the Fed’s decision. Pay attention to American retail sales on Tuesday and inflation figures on Wednesday.  

Overall, we expect the market’s nervousness increase by Thursday. The Fed’s announcement will provoke volatile moves, so be careful with open positions ahead of the event. 

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