Uncertainty Reigns Supreme Over Dollar Outlook

Although the US dollar benefited from the proposed fiscal measures of the new Trump administration while riding the tailwinds of impending rate hikes from the Federal Reserve, the significant uncertainty that lies ahead will continue to make the dollar a volatile trade. However, the ambiguity is not just limited to policy, but also the economy as data comes in more mixed. Rising interest rates combined with a US dollar that has been on a tear the last few months are already exhibiting measurable impact on economic activity.

With the latest spending and consumption data out, combined with figures from the housing sector, there are numerous signs that challenges lie ahead for the currency.Furthermore, comments by both President Donald Trump and his nominee for Treasury Secretary Steven Mnuchin continue to highlight the perception among key policymakers that the dollar is overvalued.However, despite these comments, the strengthening economic outlook could continue to contribute to dollar strength over the medium-term.

Uncertainty Sees the Dollar Dip

There are many different factors contributing to the current state of dollar uncertainty.Besides proposed policy measures lacking specifics needed to assess their actual impact, tax reform and import taxes could very rapidly change the calculus for the US dollar.Although Trump and Mnuchin have been quick to dismiss dollar strength as unwarranted, if anything, they are trying to jawbone the currency lower, knowing full well it could go significantly higher.While possible trade barriers may help the US tackle the existing trade deficit, it could also cause the dollar to rise, further restricting the export economy while creating greater imbalances domestically. Already, the impact of the stronger dollar has been evident after the advance fourth quarter GDP figures showed US exports reversed significantly from the previous quarter’s sharp rise.

While partly attributable to the downturn in soybeans exports that comprised the biggest component of third quarter growth, the stronger US dollar has meant US exports are less competitive. Furthermore, the changes in monetary policy that also fueled part of the dollar’s rise have also vastly impacted the housing sector. Both existing and new US home sales missed expectations by a wide margin in the latest readings for December. Rising interest rates are causing mortgage costs to rise, forcing buyers to pause, and potentially creating downward pressure on prices. However, even if the housing market gains taper, other areas of the economy are roaring. Personal spending continues to rise, climbing 0.50% in December over November after increasing by 3.80% during the whole of 2016.

Spending is an optimistic sign in that it could contribute to rising inflation which would be accompanied by higher interest rates. However, rate hikes mean a stronger dollar, which could be harmful to the outlook. Although spending outpacing income growth is a concerning trend, it is positive for the US dollar in the sense that the greater velocity of money will translate to inflationary upside. Nevertheless, just because rates are rising to temper inflation, pulling the dollar higher, it does not necessarily mean the economy will benefit. If anything, a stronger dollar could do more harm than good from the perspective of trade and economic activity as the GDP example above has shown. Although risks and anxiety mark the outlook, these factors could very well give the dollar a solid foundation to bounce back from.

Dollar Selloff Against Haven Reverses

Looking at the most recent price action of the US dollar versus the Swiss Franc, the January selloff has been significant, erasing all the post-election gains in the pair. However, now that certain bits of US data are turning positive once more, the dollar is regaining its strength and exhibiting serious reversal pressures. The inability to close below key support at 0.9960 has been testament to the relative strength in the currency. Looking at the momentum indicators, the Stochastic Oscillator is now trending in oversold territory, suggesting potential for a rebound from current levels should the %K and %D lines retake the 20.0 oversold threshold.

Supporting further gains in the pair is the 200-day moving average which is currently trending below the price action. While the 50-day moving average is looming above, acting as resistance, it has not historically been as formidable a level of resistance or support. Besides the moving average, the upside levels to watch for resistance include 1.0075 and 1.0165. On the downside, any candlestick close and retreat below support at 0.9960 paves the way towards secondary support at 0.9890. However, with the foundation of support so strong at 0.9960, it could conceivably provide an ideal entry point to take advantage of any bullish bounce in USDCHF.

What Binary Options Traders Should Watch For

The key to the coming sessions and the US dollar is the upcoming FOMC decision and jobs data. Although the Federal Reserve is unlikely to raise rates at this upcoming meeting, they may indicate or hint at future rate hikes. Any sense of a more hawkish outlook for policy in the accompanying statement could send the dollar surging higher versus peers. Besides monetary policy, the nonfarm payroll figure due on Friday could also shift the calculus for traders. A positive figure that exceeds consensus expectations could provide additional upside tailwinds for the dollar. Despite the uncertainty from the political side which no one can quite prepare for, with the current inflation and employment backdrop remaining in place, the risks for USDCHF remain upwards.