Fundamental Forecast for the US Dollar: Neutral

• The DXY Index closed lower on the week for the first time in 2021, but the losses were contained and offered little meaningful technical advance or decline.
• The upcoming US economic calendar is loaded with 'high-rated' event risk, and this includes the January Fed meeting – which, unfortunately, might not bring much volatility.
• The IG Client Sentiment Index suggests the US Dollar is on mixed footing ahead of the January Fed meeting.

US Dollar Trading Choppily

The US Dollar (via the DXY Index) broke the uptrend from the early January lows at the start of last week. Meandering price action took hold across USD-pairs, with the DXY Index falling by a mere -0.56% on the week.

The largest component of the DXY Index, EUR/USD, added +0.79%, while the resilient post-Brexit GBP/USD added +0.71%. The lack of a push higher in US Treasury yields may be contributing to the greenback’s lack of enthusiasm, setting it up for another week of choppy trading.

US Economic Calendar Gets Busier

The economic calendar during the final week of January will offer some key insights into the US economy, which appears to have continued its deceleration at the end of Q4’20 (see more below). On the data side of the calendar, there are five ‘high-rated' releases, as well as the medium-ranked weekly initial jobless claims, which have been the ‘canary in the coalmine’ of sorts as a bellwether for the recent slowdown.

Tuesday’s and Friday’s consumer confidence readings, the former of which is the January US Conference Board’s consumer confidence index and the latter of which is the final January US University of Michigan consumer sentiment report, may carry greater impact than normal, even as ‘soft’ data, as we are still in the early stages of an economic rebound.

The Wednesday release of the December US durable goods orders report and the initial Q4’20 US GDP report on Thursday will give traders some ‘hard’ data that will reveal the extent of the deceleration.

Atlanta Fed GDPNow Q4’20 Growth Estimate (Jan. 22, 2021) (Chart 1)

Based on the data received thus far about Q4’20, the Atlanta Fed GDPNow forecast is looking for growth at +7.5% annualized. The estimate has fallen in recent weeks, from +8.7% in mid-January, suffering an even steeper fall from its peak above +11% in mid-December.

There has been an ongoing deterioration in growth expectations as more Q4’20 data is revealed. The next Q4’20 Atlanta Fed GDPNow forecast will be released on Wednesday, Jan. 27.

The week ahead is defined by none other than the first Federal Reserve policy meeting of the year, which should culminate in the FOMC keeping its main interest rate on hold. After much ado about a potential tapering of its QE program, Fed officials took to the airwaves in mid-January to hush a potential taper tantrum. The first meeting of the year -- without a new Summary of Economic Projections -- may offer little by way of tangible policy shifts to provoke volatility.

Federal Reserve Interest Rate Expectations (Jan. 22, 2021) (Table 1)

The Federal Reserve pushed back against rising expectations of a more hawkish central bank, tamping down taper tantrum concerns with a bevy of speeches in mid-January.

As long as Fed Chair Jerome Powell is at the helm, the FOMC will stay the course with the intent of keeping interest rates low through 2023. Fed funds futures are pricing in a 93% chance of no change in Fed rates in 2021. The January Fed meeting should come and go without much fanfare.

US Dollar Net-Long Futures Positioning Plummets, DXY Index Does Not (Chart 2)

Finally, looking at positioning, according to the CFTC’s COT for the week, speculators slightly increased their net-short US Dollar positions to 14,277 contracts, up from 13,907 contracts held in the week prior. Net-short US Dollar positioning has been relatively stable since the third week of December, when speculators held 14,056 net-short contracts.