US dollar: forecast for December 21-27
US dollar showed moderate gains in the past week. The market regarded the outcome of the Federal Reserve’s meeting as more hawkish than expected: the Federal funds rate range was increased by 25 bps and the forecast of the 4 rate hikes in 2016 remained unchanged.
After the net bullish dollar positions declined in the first half of December and the currency corrected to the downside, it can now draw more support from the Fed’s decision. Looking forward we think that the greenback will be able to gain the medium term, though its gains will be gradual. Stock markets have responded to the Fed’s rate hike rather well, so the market’s risk sentiment should be supportive for American currency against the euro, Japanese yen and Swiss franc.
This week watch US final Q3 GDP on Tuesday and a big block of data on Wednesday, including core durable goods orders and new home sales. At the same time, year-end flows will reduce the importance of fundamental drivers and can hurt dollar. On the other hand, keep an eye on oil, which remains extremely volatile: there may be further declines, so USD can gain more versus commodity currencies.